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3 Reasons Visa Inc. Is a Buy

By Matthew Cochrane – Updated Nov 12, 2018 at 7:14PM

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The payments network's full fiscal-year results provided more evidence that the company is perfectly poised to capitalize in overseas markets.

Shares may have dipped slightly when Visa Inc (V 3.00%) reported its fourth-quarter earnings late last month, but shareholders with a long-term mindset still had every reason to be pleased with the results. The company continues to sport one of the best operating margins in the market, and it's growing its top and bottom lines by double-digits as it capitalizes on its position to benefit from the war on cash.

In Q4, Visa's net revenue rose to $5.4 billion, a 12% increase year-over-year, while its adjusted earnings per share (EPS) grew to $1.21, a 34% increase year-over-year. This strong revenue and earnings growth was fueled by double-digit increases in payments volume and processed transactions and a low single-digit increase in the number of cards issued.

Visa Metrics 2018 Q4 2017 Q4 Change (YOY)
Revenue $5.43 billion $4.86 billion 12%
Adjusted EPS $1.21 $0.90 34%
Payments volume $2.09 trillion $1.9 trillion 11%
Total transactions 47.8 billion 43.1 billion 11%
Total cards 3.3 billion 3.2 billion 2%

Data source: Visa Inc.

After reviewing the company's conference call, three particularly bullish takeaways stood out that should cause investors to take notice: The Visa Europe migration to Visa's network is now complete; Visa is performing well in emerging markets; and it's continuing efforts to return capital to shareholders via buybacks and dividends.

Close-up of gold-colored credit card showing partial credit card number and the EMV chip.

Earlier this quarter, Visa finished moving its European clients to its global platform, VisaNet, giving its European clients access to the same technology and security the rest of its global customers enjoy. Image source: Getty Images.

The Visa Europe migration

Since acquiring Visa Europe, Visa has been busy moving its European clients to its global platform, a task that would give its European clients access to the same technology and security the rest of its global customers enjoy. This process is now complete. In the conference call, CEO Al Kelly said:

Our European clients now have access to all our global capabilities. In fact, more than 60 clients are already utilizing at least one of our advanced risk services having just completed the migration. This was a very large effort that required sustained vigilance on our part to ensure there was no disruption to our clients. So we really couldn't be happier about the execution and we're now moving forward with one level platform. Our European clients also now enjoy the highest level of security and protection from our global cybersecurity systems and processes, in fact, earlier today we inaugurated a cyber fusion center in London, making it our second fusion center globally.

Now that the migration is complete, Visa can turn its attention to other matters, including making partnerships with European financial technology, or fintech, companies, and offering value-added services to its European customers.

An emerging force in emerging markets

Europe is not the only overseas market where Visa is making waves. In the Asian-Pacific market, Visa announced several co-brand card deals with some of the region's largest merchants, including NTUC FairPrice, Singapore's largest supermarket; the Mall Group, one of Thailand's biggest retailers; and AirAsia in Malaysia.

In India, Visa renewed its relationships with some of the country's largest banks, including the State Bank of India, HDFC Bank Limited (HDB -3.29%), and ICICI Bank Ltd (IBN -3.60%). In the conference call, after announcing these deal renewals in India Kelly concluded, "[W]e are confident that these deals contribute to the further strengthening of our market leadership position across debit and credit products."

In Latin America, Visa also signed a major co-brand card deal with Corp's (DESP -1.29%) Decolar, the region's largest online travel agency, and a 10-year agreement with Banco Bradesco SA (BBD -3.93%), one of the market's largest card issuers. These deals have helped ensure Visa's payment volume continues to grow about twice as fast as worldwide personal consumption expenditures.

A shareholder-friendly management team

Finally, investors should not overlook the large amounts of capital Visa returns to shareholders. Thanks to its adjusted operating margins of 66%, a level so high as to be almost unheard of -- noticeably higher than even rival Mastercard Inc's (MA -0.85%) 59% -- Visa has plenty of cash to return to investors by way of share repurchases and dividends. And lately that is exactly what the company has been doing.

This quarter, Visa spent about $1.6 billion buying back shares; over the course of the fiscal year, the figure spent on repurchases was $7.2 billion. Visa recently raised its quarterly dividend by 19% to $0.25, good for about a 0.72% dividend yield. While the yield is paltry and well below the market's average, it keeps the payout ratio between about 20% and 25%, a range Visa intentionally targets.

In 2019 Visa anticipates generating about $13 billion in free cash flow, $11 billion of which the company hopes to return to shareholders via share repurchases ($8.5 billion) and dividends ($2.5 billion).

Worth the price

Visa shares are certainly not cheap. Based on its adjusted EPS in 2018, shares currently trade at a P/E ratio a shade above 30, a premium valuation to be sure. Yet despite the high price, investors should seriously consider the payment network for their portfolios.

In Europe, Visa has now finished the mammoth of task of moving its clients to its global network, a move that will allow it to offer better services across the continent. Visa's leadership positioning in global markets, just now beginning to move toward the digitization of money, is a thing to be envied.

Finally, Visa's dedication to returning money to shareholders is an effective tool for holding management accountable for running its network and company in an efficient and profitable manner. These factors make Visa one of those companies that fits Warren Buffett's credo that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Matthew Cochrane owns shares of Mastercard. The Motley Fool owns shares of and recommends Mastercard. The Motley Fool owns shares of Visa. The Motley Fool has a disclosure policy.

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