Can Visa Inc. Afford to Boost Its Meager Dividend?

Visa could surely afford to increase its piddling 0.8% dividend yield -- but the company has other priorities. Invest accordingly.

May 30, 2014 at 2:00PM
Visa Logo

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.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Visa. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers