This article was updated on Oct. 5, 2017, and originally published April 28, 2017.
The average investor has more than 5,000 publicly traded stocks on reputable U.S. exchanges to choose from. With that many stalks of hay in the barn, finding that proverbial needle in the haystack can be quite difficult.
If you're looking for perhaps the world's most perfect stock, your search might end with payment processing giant Visa (NYSE:V). Since the company went public in March 2008, shares of Visa have risen by 581%, inclusive of its split in 2015. Despite this strong move higher, there are plenty of reasons to believe there's more left in the tank.
Here are 10 reasons Visa just might be the world's most perfect stock.
1. A high barrier to entry in the industry
Some of the best investments are those that offer competitive advantages. While Visa is certainly not free of competition, there aren't any surprising new entrants into the payment processing industry. The reason is that laying the infrastructure, getting the proper software in place, and building a merchant network takes a lot of time and money. The exceptionally high costs of being involved in the payment facilitating industry means Visa has a pretty clear vision of who its competitors are and what it needs to do to stay on top.
2. No lending risk
Another factor that long-term investors are bound to like with Visa is that unlike peers American Express (NYSE:AXP) and Discover Financial Services (NYSE:DFS), it's purely a payment facilitator and not a lender.
There are moments where I can imagine investors would prefer to see Visa lending money. When the economy is growing at a healthy pace and consumers are piling on debt with low delinquency rates, Discover and AmEx are able to double-dip by collecting the interest on loaned money, as well as the revenue from processing credit card transactions. But Discover and AmEx also become exposed to rising delinquency rates if the U.S. or global economy falters, which can hurt their businesses via charge-offs.
Visa doesn't have to worry about this. It merely focuses on being the transaction middleman, which means it can probably withstand recessions far better than Discover or AmEx.
3. Top-tier U.S. market share
According to data from WalletHub, Visa's U.S. credit card market share by network purchase volume has grown throughout the years. In 2006, Visa's market share was 42.5%, which was more than 13% ahead of its next-closest rival, MasterCard (NYSE:MA). By 2016, Visa's market share has risen to 50.6%, which is more than double that of its next-closest competitor, AmEx, which is at 22.9%.
Visa also has 328 million credit cards in circulation in the United States, which is actually more than MasterCard (192 million), American Express (57.6 million), and Discover (58 million) combined!
What all this means is that Visa has clear-cut market share advantages, and it's the top branded payment processing network among merchants. Translation: You'll sleep well at night because Visa is primed to be the leading credit card network for years to come.
4. Geographically diverse revenue stream
It's no secret that Visa relies on developed countries to provide the bulk of its revenue and profits, but the company today operates in more than 200 countries worldwide. This means that if the U.S., or any major developed country, enters a recession, Visa may be able to hedge its downside by leaning on purchasing-dollar growth in emerging-market countries, which may be unaffected by a global slowdown. Africa, Southeastern Asia, and the Middle East could play a big role in Visa's growth in the decades to come.
5. A multi-platform company
Visa is, and will continue to be, best known for facilitating credit card transactions. However, the company is no longer bound by plastic. Visa's services can be seen with point-of-sale tablets, laptops, and mobile devices. Its investments in next-generation technologies should do well to appeal to a younger generation of shoppers who strongly value convenience and their time, as well as to solidify its dominant market share.
6. Inorganic growth
Long-term investors will also probably appreciate Visa's preference for organic growth via network expansion. Over time, global GDP is on the rise, which means that if Visa can expand its network to more merchants, it should be able to reap the rewards of steady global growth.
But Visa has also been known, on rarer occasions, to supplement its growth through acquisitions. Perhaps its most notable purchase came in June 2016 when it completed its buyout of Visa Europe. The deal increased its merchant reach to 40 million, boosted its cards in worldwide circulation to around 3 billion, and brought its global payments volume to roughly $6.8 trillion annually. The innovation, scale, and added profits that Visa Europe brings to the table make Visa all the more attractive.
7. Partnerships and collaborations
Of course, Visa doesn't have to be acquiring businesses to make waves. It has also been an active partner and collaborator when it comes to next-generation payment processing tools and services. For example, in July 2016, Visa and PayPal (NASDAQ:PYPL) announced a strategic partnership that allows Visa debit customers to move money instantly on PayPal and Venmo accounts. In return, PayPal receives incentives for increased Visa card spending volumes.
Another good example is Visa's partnership with IBM's (NYSE:IBM) Watson. The idea behind this collaboration is that Visa may be able to use IBM Watson's Internet of Things (IoT) platform to reach thousands of IoT client companies. For instance, USA Today describes an instance where a sensor in a car might alert the driver when it's time for a part replacement, allowing the driver to complete the order of the part using their car's dashboard.
Partnerships like those with PayPal and IBM Watson give Visa new channels with which to reach consumers and boost engagement.
8. Low-yield environment
The low interest-rate environment has also been a long-term positive for Visa. Remember, the federal funds target rate has an impact on a number of interest-bearing assets and services, including credit cards. The longer the Federal Reserve keeps its federal funds target rate below its historic average, the more likely consumers are to use their credit cards.
Interestingly enough, though, the average credit card APR hit an all-time high in September, which is probably a result of lenders getting more aggressive with their interest rates since lending rates have been stuck near record lows for so many years. Long story short, as long as the Fed continues to walk on eggshells, Visa will likely benefit.
9. Shareholder yield
Visa may not have the most robust dividend in the financial sector, but that doesn't mean it's not thinking of its shareholders when it's raking in the cash. In April, Visa announced a $5 billion share repurchase agreement with the release of its second-quarter earnings results. This isn't the first time Visa has laid out plans to repurchase $5 billion of its common stock, either. It did so in October 2014 as well.
In addition, Visa's quarterly payout has doubled from $0.0825 a quarter in August 2013 to $0.165 per quarter today. Though this only translates to a 0.6% yield, Visa has demonstrated that it has the cash flow and profits to significantly increase this payout if it chooses to.
10. A reasonably attractive valuation
Finally, Visa is still valued attractively, even if its forward P/E of 27 is higher than that of the S&P 500. Unlike the average growth rate of the S&P 500, Visa has been able to continually grow its top line by roughly 10% per year, and it's likely going to continue growing at 10%, if not better, for the near future. Its PEG ratio of 1.85 signifies a company that may still be inexpensive.
Given its international expansion opportunities, its dominant market share, and its next-gen collaborations, Visa very well could be the world's most perfect stock.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard, PayPal Holdings, and Visa. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.
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