Please ensure Javascript is enabled for purposes of website accessibility

Haven't Bought Visa Yet? Consider This

By Dave Kovaleski - Mar 19, 2021 at 7:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In one key metric, it's off the charts.

There is a lot to like about Visa (V 3.13%), the world's largest payment processor. It has been an earnings machine, as earnings per share have increased nearly 20% per year over the last 10 years. Investors have seen the stock price increase 28% per year on an annualized basis over the past decade through 2020.

If you've missed out on Visa's fantastic run over the past 10 years, don't dwell on it -- there are a few good reasons why Visa will probably generate double-digit returns over the next decade, too. It enjoys a virtual duopoly in the credit processing space, along with Mastercard. Also, it has a major tailwind in the growth of e-commerce. In 2023, about 22% of global purchases will be made online, according to projections, and by 2040 that's expected to spike to about 95%.

As the world gradually moves away from cash, Visa stands to benefit as much as any company. But there is one metric that really speaks to why Visa has been able to maintain its leadership position and change with the times. If you haven't bought Visa yet, consider this.

A woman in an office looking off to the side, as if considering a question.

Image source: Getty Images.

Ridiculously high margins

A company's operating margin is a great indicator of how well-run and efficient it is. It measures how much profit a company makes on a dollar of sales after expenses for that sale -- including production costs, salaries, equipment, materials, marketing, and more. The higher the margin, the better, as that means it is making more profit off that sale.

Some sectors are more profitable than others, but for the most part, an operating margin of 15% is considered good -- anything higher than that is very good to great. Then there's Visa. Its operating margin is off the charts at 65%. That means for every dollar it makes, before interest and taxes, it earns $0.65 profit. You won't find many margins higher than that no matter where you look.

Better than its competitors

Because payment processors earn a fee every time someone makes a purchase on their network, there is very little overhead compared to other industries. But still, even within the credit card and payments space, Visa's operating margin is extremely high. Its main competitor, Mastercard, has a margin of 53% -- which is great but obviously a step below. Discover Financial Services and American Express have operating margins of 26% and 14%, respectively (although they offer other services that cost more to operate), while payment provider PayPal is at 16%.

It should be noted that Visa's margin didn't spike in 2020. It's been at or around its current level since 2013 and over 50% since 2009 -- except for a dip into the 20% range from 2012 to 2013. So, what does this mean to investors?

It shows us that Visa has been able to maximize profits with its low-cost business model. But beyond that, it's a sign of stability. With such consistently high margins, investors can feel confident that the company can remain profitable even during the worst economic periods.

In addition, a high operating margin means that the company is generating a lot of free cash flow, which is the cash left over after all capital and operating expenses are paid. That cash can be used to pay off debt; invest in new technology, equipment, or acquisitions; or give back to investors in the form of dividends

The company's operational efficiencies, combined with its status in the industry and expected growth of the market, make Visa a stock to consider.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Visa Inc. Stock Quote
Visa Inc.
$204.00 (3.13%) $6.19
American Express Company Stock Quote
American Express Company
$161.85 (3.46%) $5.42
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$338.86 (2.77%) $9.13
Discover Financial Services Stock Quote
Discover Financial Services
$107.95 (4.81%) $4.95
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$79.75 (2.70%) $2.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.