Businesses with competitive advantages in industries with massive secular tailwinds can make investors much richer over time. This is because competitive advantages often translate into higher profit margins. And industry tailwinds can propel revenue and earnings upward, which leads to share price growth.
Parlaying a $10,000 investment from 10 years ago into $61,820 with dividends reinvested today, Visa (V -0.64%) has crushed the Dow Jones Industrial Average in the last 10 years. For context, the index turned that same amount into $32,800 during that time with dividends reinvested.
And for those seeking superior returns to the Dow Jones, Visa's market-smashing performance appears poised to continue moving forward. Here's why.
Visa is still the leader in a growing and lucrative industry
Visa's almost 4.1 billion debit and credit cards in circulation as of June 30 make it the largest publicly traded payments company on the planet. This is considerably larger than the next biggest competitor, Mastercard (MA -1.16%), which had a total of 2.6 billion cards in circulation as of June 30.
In the payments processing industry, the size of a company's payment network is critically important. The more cards there are on a network, the harder it becomes for merchants to ignore the additional sales that could result from accepting that payment network as a payment method. As more merchants around the world continue to accept alternative payments from customers, this will propel industry growth. That's how the consulting firm, Boston Consulting Group, expects that the global payments industry will grow from $1.5 trillion in 2021 to just shy of $3 trillion by 2030.
More consumers in emerging markets where cards are less accepted will respond to higher merchant acceptance rates of networks such as Visa by opening accounts with financial institutions. This will perpetuate the company's virtuous cycle of increased payments volume, processed transactions, and cross-border volume, which fuels revenue and earnings growth. This is why analysts believe that the company will generate 16.8% annual non-GAAP (adjusted) diluted earnings per share (EPS) growth through the next five years.
And if Visa's earnings growth potential wasn't enough, the company also has mind-boggling profitability going for it due to its unrivaled competitive position. In its fiscal year ended September 2021, Visa's non-GAAP net margin was 53.7%. This was significantly better than Mastercard's 44.1% non-GAAP net margin in its fiscal year ended December 2021. Put another way, for every dollar of revenue produced, Visa earns nearly a dime more in profits than Mastercard.
Image source: Getty Images.
A payout that could skyrocket in the long run
Visa's 0.9% dividend yield is a fraction of the Dow Jones index's average yield of 2.6%. But the company's comfortably double-digit annual earnings growth prospects should easily make up for this discrepancy over the long haul.
Visa's dividend payout ratio was just 20% in its fiscal year that ended in September. This low payout ratio allows the company to invest in future growth opportunities, repay debt, and execute share buybacks. And it gives Visa the discretion to raise its dividend over time, which could lead to dividend growth in excess of earnings growth over the next few years.
Visa remains a blue chip to buy and hold forever
Visa is a world-class business. But the stock's valuation doesn't seem to completely line up with its fundamentals.
Visa's trailing 12-month price-to-free-cash-flow ratio of 24.8 is materially below its 10-year median ratio of 30.2. Given that the company's growth prospects are about as strong as they have been over the last decade, this is an attractive entry point to buy the shares with the intention of holding them forever.
