Can Visa Inc. Afford to Boost Its Meager Dividend?

Source: Visa.

Every stock on the Dow Jones (DJINDICES: ^DJI  ) pays a dividend. But some income generators are richer than others, and no blue-chip company offers a slimmer dividend yield than Visa's (NYSE: V  ) 0.8%.

The average Dow stock provides a 2.7% yield these days. Can Visa afford to boost its quarterly payouts, and to get closer to its peers on the market's best-known index?

First, let me point out that Visa actually works on improving its dividend policies. The annual payout has nearly quadrupled over the last five years. That hardly counts as sitting still.

However, Visa's free cash flow has exploded in the same period. In mid-2009, Visa's trailing free cash flow was $744 million. The metric has since jumped to $7.2 billion. That's nearly a tenfold increase in five years, and way ahead of Visa's dividend growth.

The credit card manager today only pays out 16% of its free cash flow in the form of dividend checks. In the last six months, the company has shoveled $507 million of dividend cash into the pockets of shareholders. That's out of $3.2 billion of free cash flow generated in the same period.

There's plenty of headroom for dividend increases here. Visa is nowhere near exhausting its cash flow on pricey dividend policies.

So how is the company spending all that surplus cash?

As it turns out, Visa directed $2.2 billion into share buybacks over the last six months. That's 69% of Visa's free cash intake. At times, Visa spends so much money on buybacks that it must dip into cash reserves to finance the policy. That was the case for most of 2013, for example.

V Free Cash Flow (TTM) Chart

V Free Cash Flow (TTM) data by YCharts.

The company is returning a ton of cash straight to shareholders, but dividends just aren't the preferred method.

Share buybacks can be lucrative for stockholders, but only if the stock was undervalued to begin with. This is one reason why business managers like to engage in buybacks -- if nothing else, it's a pretty solid vote of confidence in future growth. But boards and executive teams aren't always the best investors on the market, and buybacks aren't always the best use of capital resources.

But that's just a general observation. What about Visa's specific case?

Well, the buybacks have certainly accelerated faster than Visa's share price in the last five years. They have also raced way ahead of free cash flow. In other words, Visa is using an increasing portion of incoming cash to finance its share repurchases. And the policy has not resulted of massive share price increases, which arguably is the end goal of buybacks.

Time is the only true judge of comparative trends, and it might be a little early to chide Visa for overly generous buybacks at this point.

V Chart

V data by YCharts.

But the early signs aren't great, and investors would have been served better so far by a slower buyback and more generous dividend increases.

In Visa's latest analyst call, management signaled even more buybacks in the future. "We remain bullish on our future growth prospects and fully committed to returning excess cash to our shareholders," said CFO Bryan Pollitt. But dividends were never even mentioned in that call.

I suppose we should expect Visa to stay the course for the foreseeable future. Dividends will grow, but only at a modest rate. The stock has more than doubled the Dow's return over the last year, but Visa will keep retiring shares at a breakneck speed.

So the dividend yield will stay modest, balanced by a very generous buyback policy. Keep these trends in mind if you're looking at Visa for your own portfolio -- buying it for rapid dividend growth makes no sense, but the company lets you bet big on long-term share price growth. It's a value stock, not an income generator for the long run. Invest accordingly.

Top dividend stocks for the next decade
Visa might not be the Dow's richest dividend goldmine, but how do you find the best income-producing stock? The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2977499, ~/Articles/ArticleHandler.aspx, 10/2/2014 10:49:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement