Building significant wealth as an investor requires picking the most dominant businesses in an industry that will steadily grow.
Due to the expectation that e-commerce will keep growing and cash use will continue to decline around the world, the outlook is encouraging for the payments industry. In fact, the consulting firm Boston Consulting Group anticipates that the global payments industry will grow from $1.5 trillion in 2021 to $2.9 trillion by 2030.
With a $443.5 billion market capitalization, Visa (V 0.01%) is the largest publicly traded financial technology (fintech) stock in the world. Let's dig into why Visa looks like a great buy to help investors compound their wealth.
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Visa often outperforms expectations
Visa trounced the analyst consensus for both net revenue and non-GAAP (adjusted) diluted earnings per share (EPS) when it reported its second-quarter earnings on April 26.
The company recorded $7.2 billion in net revenue during the quarter, which is equivalent to a 25.5% growth rate over the year-ago period. And this growth is even more impressive than it appears because of Visa's discontinuation of business in Russia during the quarter, which was approximately 4% of the company's total net revenue.
This comfortably exceeded the analyst estimate of $6.8 billion in net revenue for the second quarter. How did Visa beat the analyst net revenue consensus for the eighth quarter out of the past 10 quarters? This tremendous performance was driven by growth in each of the following three key metrics for Visa: payments volumes, total cross-border volumes, and processed transactions.
Because the disruptions from the COVID-19 omicron variant were short-lived, the company's payments volumes surged 11.1% higher year over year to nearly $3.4 trillion in the second quarter.
A recovery in international travel led Visa's total cross-border volumes to soar 38% higher over the year-ago period. This can be credited to the rollout of widely available vaccines and treatments for COVID-19, which have prompted most countries to reopen their borders to tourists.
Finally, the company's processed transactions climbed 19% higher year over year to 44.8 billion in the second quarter.
Visa generated $1.79 in adjusted diluted EPS during the quarter, which works out to a 29.7% growth rate over the year-ago period. This handily topped the average analyst-adjusted diluted EPS prediction of $1.65. And it was the 10th quarter out of the last 10 quarters that Visa has matched or outdone the analyst earnings consensus.
Besides the company's significantly higher net revenue base, this was the result of two factors. First, Visa's non-GAAP net margin expanded 50 basis points higher year over year to 53.4% in the second quarter. Second, the company's outstanding diluted share count fell 2.3% over the year-ago period to 2.1 billion shares.
High dividend growth will continue
Visa also pays a steadily growing dividend to its shareholders. The stock's dividend payout ratio is expected to be 21% in the current fiscal year that ends in September. This is a sustainable payout ratio that allows Visa to retain more than enough capital for business expansion, debt repayment, and share repurchases. That's why I believe the dividend will at least grow in line with earnings for the foreseeable future.
And with analysts anticipating 18.1% annual earnings growth through the next five years, Visa will be handing out huge raises to shareholders. This makes up for the stock's 0.7% dividend yield, which is about half of the S&P 500 index's 1.5% yield.
A wonderful business at an attractive valuation
As if Visa's strong fundamentals weren't enough, the stock's valuation looks to be reasonable.
At the current $213 share price, Visa's forward price-to-earnings (P/E) ratio is 25.4. This is significantly higher than the credit services industry average of 15.5. But this premium is justified, in my opinion, because Visa doesn't have any credit risk since it doesn't provide credit to customers. Thus the company's toll-booth business model holds up better in recessionary periods than its peers.
And Visa's 0.7% trailing-12-month dividend yield is somewhat higher than its 10-year median yield of 0.6%. With the company's fundamentals arguably as strong as they have been at any point in the past 10 years, this suggests that Visa's shares can be picked up at a discount.
