Dividend stocks come in all shapes and sizes, but their ability to pay and raise their payout is what matters at the end of the day. There might not be a more resilient dividend stock than payment technology company Visa (V -0.66%). The company doesn't have a decades-long track record like some other popular dividend names, but Visa makes up for it in other ways.
Visa's profitability, dominance in its industry, and stellar balance sheet combine to make it a dividend stock you can hold through virtually every economy, market, or crisis you can think of. Need more convincing? Kick back and read on.
Absurdly awesome cash flows
Visa is a payment services company; its network connects merchants to banks, enabling transactions when you swipe your payment card at the store or gas station or use it online. Think of payment networks as the highways that connect our cities and the transactions as the cars going from place to place. Instead of a toll, Visa charges a small fee, a percentage of each transaction its network supports. Visa powers roughly 40% of the world's card transactions, the most of any brand.
You can see below that Visa has grown like clockwork over time, averaging 11% annual revenue growth over the past decade. Operating profits have increased by 12% on average, which means revenue is growing faster than expenses. It makes sense -- Visa's payment network has been built and doesn't need huge investments to maintain.
V Revenue (TTM) data by YCharts
Visa's profitability sets it apart from most businesses; you will have difficulty finding a company doing $29 billion in annual revenue and converting 60% of it to free cash flow. The business is also very durable because people spend money daily. Sure, a recession might hurt spending some. Still, you can see how Visa's drop in revenue during COVID-19, a singularly terrible event that ground the economy to a halt, looks like a blip in the long-term chart above.
It might be the ideal dividend growth stock
Admittedly, you might not jump on Visa if your goal is maximizing dividend income today. After all, Visa's dividend yield is just 0.8% at the current share price. But listen up if you have a longer time horizon: Visa's dividend has increased by an average of 21% annually over the past decade.
V Dividend data by YCharts
Visa has grown so fast over the years that the company's dividend payout ratio is still just 18% of its cash profits despite repeatedly significant increases. Growth can get harder as numbers increase, so Visa's growth will likely slow. However, Visa should have plenty of ammo for years of double-digit dividend growth. Analysts believe the company's earnings per share (EPS) will average 15% annual growth over the next three to five years, so this growth story isn't over.
The stock's on sale today
The bear market hasn't been fun, but the deals it creates are a silver lining that investors should take advantage of. Visa has averaged a price-to-earnings ratio (P/E) of 33 during the past decade but trades at a P/E of about 25 today. Even after bouncing off its lows of the year, the stock is still trading about 25% below the valuation that's been typical for it in the past.
V PE Ratio (Forward) data by YCharts
To put it another way, Visa trades at a slight premium to the broader market, despite having a superior growth outlook (the market averages 10% growth historically) and much higher profit margins. Investors are getting a dividend that survived a global pandemic and could grow at double digits for the foreseeable future.
