Since Warren Buffett took over as the chairman and chief executive officer of Berkshire Hathaway (BRK.A -0.62%) (BRK.B -0.51%) in 1965, he has transformed it from an obscure textile company into a giant of the corporate world.
Berkshire Hathaway's $692 billion market capitalization makes it the seventh-largest publicly traded company in the world. Buffett's knack for picking high-quality stocks is what makes it worth considering whether some of his holdings could fit into your portfolio.
Visa (V -0.25%), the world's most dominant payments processing company, is the 19th largest position in Berkshire Hathaway's portfolio, with a current value of $1.8 billion. But should you make it part of your portfolio? Let's look at the fintech stock's fundamentals and valuation to answer this question.
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Visa is a well-oiled machine
When Visa released its fiscal first-quarter earnings on Jan. 27, the report showed that the company exceeded analysts' estimates for revenue and non-GAAP (adjusted) diluted earnings per share (EPS).
Visa reported $7.06 billion in net revenue in the quarter ended Dec. 31, 24.1% growth from the year-ago period. This easily topped the average analyst revenue forecast of $6.79 billion.
The company beat the analyst net revenue consensus for the eighth quarter out of the past 10 as a result of strong performance across the board in payments volumes, payments transactions, and cross-border volumes.
Payments volumes (the total dollar amount of transactions that Visa's networks helped to process) increased 19.8% year over year to $2.97 trillion in the first quarter.
Payments transactions (the total number of transactions that the company helped to complete) surged 20.8% year over year to 62.30 billion during the first quarter.
And cross-border volumes (the payments volume where the issuing country of a Visa card differs from the merchant country) soared 37% in the first quarter.
Growth was helped as many nations reopened their borders to tourists last October and November, according to chief financial officer Vasant Prabhu's opening remarks during the company's recent earnings call.
Visa's adjusted diluted EPS increased 27.5% year over year to $1.81 in the quarter, surpassing analysts' predictions of $1.70.
How did Visa best analysts' adjusted diluted EPS expectations for the ninth quarter out of the past 10? Aside from Visa's considerably higher net revenue base, the answer lies within the company's non-GAAP net margin, which increased 30 basis points year over year to 55.3% in the first quarter. In other words, the company converted $0.55 out of every $1 of sales into profit. Out of the dozens of companies that I follow, this is the highest that comes to mind.
And thanks to Visa's tremendous scale and willingness to adapt to new payment technologies, analysts anticipate that the company will generate 18% annual earnings growth over the next five years.
The dividend is a bonus
Visa is a fundamentally healthy business, but what makes the stock even more appealing is its rapidly growing dividend.
Its dividend payout ratio in its previous fiscal year was 21.7%, and since the company's business requires minimal capital expenditures to run, this leaves it with tons of flexibility to build on its 14 consecutive years of dividend hikes. That's why I expect annual dividend growth in the mid- to upper-teens percentages for the foreseeable future.
Visa's pairing of healthy fundamentals and a low payout ratio explain why the company's board of directors was confident enough to boost the payout by 17.2% last October. While Visa's 0.7% dividend yield is approximately half of the S&P 500's 1.5%, the growth potential of the dividend more than makes up for the lower yield.
An excellent business at a fair price
Visa is a high-quality stock based on its fundamentals. And it doesn't appear to be receiving the recognition that it deserves, either.
The price-to-earnings ratio based on earnings estimates for this year is 31 at the current $219 share price. Stacked up against its potential for high-teens percentage annual earnings growth, this is a reasonable valuation for a stock of Visa's quality. The 0.7% dividend yield is also a bit higher than its 0.6% 13-year median yield, which also supports the idea that Visa is a solid buy right now.
