Mounting concerns about the state of the U.S. economy have weighed on the S&P 500 index in 2022. Even with the recovery in recent weeks, the index is still down 12.5% so far this year.
The payments processing stock Visa (V 0.33%) has held up much better than the broader market -- down just 3%. But should growth investors buy the stock for their portfolios? Let's dive into Visa's fundamentals and valuation to get an answer.
Yet another great quarter
Last month, Visa released its financial results for its third quarter ended June 30. And unsurprisingly, the company's results were robust. Visa reported $7.3 billion in net revenue in the third quarter, which was up 18.7% over the year-ago period.
What was behind the payment processor's admirable net revenue growth for the quarter? The answer lies within Visa's across-the-board, double-digit growth in all three major areas: Payments volume, cross-border volume total, and processed transactions.
Payments volume is the dollar amount of transactions that are processed by the company's network. Visa reported $2.9 trillion in payments volume during the third quarter, which was up 8% year over year. Adjusting for unfavorable currency translation due to the strong dollar, Visa's payments volume was up 12.3% over the year-ago period.
The company's solid payments volume growth was the result of border reopenings. More international travel translates into higher consumer spending, which benefits Visa. This explains how Visa's cross-border volume total was 40% higher year over year. Cross-border volume refers to transactions where the issuing country differs from the merchant country. The recovery in cross-border travel also helped to propel processed transactions 16% higher over the year-ago period.
Visa recorded $1.98 in non-GAAP (adjusted) diluted earnings per share (EPS) in the third quarter, which was a blistering 32.9% year-over-year growth rate. What accounted for this staggering growth rate?
In addition to its larger net revenue base, Visa's non-GAAP net margin surged 470 basis points higher over the year-ago period to 57.8% during the quarter. Combined with a 2.5% reduction in the company's weighted-average share count to 2.1 billion, this is how adjusted diluted EPS growth nearly doubled net revenue growth in the quarter.
As cash is continually displaced, Visa's alternative payment methods will flourish. That's why analysts believe that the company's adjusted diluted EPS will compound at 18.2% annually over the next five years.
Image source: Getty Images.
Tremendous dividend growth is poised to continue
Visa's 0.7% dividend yield is well below the S&P 500 index's 1.5% yield. But the biggest reason that its yield is so low compared to the broader market is that the stock has produced 21.5% annualized returns over the last 10 years. As fast as the company's dividend has grown, so has its share price.
Visa's dividend should be able to keep growing at a high-teens percentage rate each year for the foreseeable future. That's because the dividend payout ratio will come in around 21% for this fiscal year. This is why the dividend should be able to grow at least as fast as earnings in the years ahead.
The valuation isn't excessive
Visa is a thriving business. And the stock appears to still be a bargain for growth investors with a five-year-plus time horizon.
This is supported by the fact that Visa's 0.7% dividend yield is above its 10-year median yield of 0.6%. With the COVID-19 pandemic further accelerating the shift away from cash use, the company's fundamentals appear as promising as ever. That's why there's reason to believe that the stock should be trading closer to a 0.6% dividend yield. Moderate valuation expansion is the cherry on top of Visa's lofty growth potential, which is what makes it a compelling buy for growth investors.
