The stock market has been unpredictable in 2022, and it doesn't look like 2023 will be any better. Investors are still worried about how prevalent inflation will be in the new year. That's not to mention the fears about a recession impacting the U.S. economy.
This unpredictability often translates into stock price declines, and 2022 has made that clear: The Nasdaq Composite index has fallen 32% this year. With so much uncertainty, investors might crave some stability and consistency. Visa (V 0.33%) has a track record of offering this, with a 13-year history of providing and raising a dividend.
This consistency might be part of the reason why shares of Visa have only slumped 5% year to date. The question is, however, will it continue? Let's find out.
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Visa has raised its dividend every year for the past 13 years. These raises aren't small, either. This year, the company boosted its quarterly dividend payment by 20% to $0.45. Over the past 13 years, Visa's dividend growth has been incredible. The company has grown its dividend payment by over 1,600% since it initially started giving cash to shareholders.
Could 2023 hold it back?
Many investors fear that the worst is yet to come and that 2023 could be a challenging year for all businesses. U.S. inflation is still above 7%, signaling that the Federal Reserve's interest rate hikes haven't significantly affected the economy yet. However, the effects could come to fruition in 2023, sending the economy downhill. If a recession does hit, total activity on Visa's platform could decline, hurting the company's top and bottom lines.
These concerns are valid and could hurt Visa's ability to boost its dividend next year. However, the company is more resilient than many might think because Visa's free cash flow and profits are tremendous. In fiscal 2022 -- which ended Sept. 30, 2022 -- the company generated nearly $17.9 billion in free cash flow. Comparatively, it used only $3.2 billion to pay its dividend.
Even if the company's free cash flow declined by 50% in fiscal 2023, Visa would still have over $8.9 billion in free cash flow. This is plenty of cash from which the company can pay its dividend, meaning that even if 2023 is rough for the company, dividend expansion is still in the cards.
The company's payout ratio -- the proportion of net income paid out in a dividend -- is also only 21.4%. If the company's net income dropped 50% and its payout ratio therefore doubled, it would still only be 43%, which is generally considered a sustainable and healthy payout ratio.
Is Visa worth buying in 2023?
Visa's business has remained rather sturdy this year, as revenue steadily increased 22% year over year to $29.3 billion in fiscal 2022. Additionally, the company is a duopoly in this industry alongside Mastercard, providing relative safety. Add a sustainable dividend that will likely rise over the next 12 months -- and maybe even the next 12 years -- and you have an attractive stock to own.
Today's valuation makes Visa even more attractive. Shares now trade at 29.4 times earnings, an 18% discount from the valuation shares traded at the start of the year. It is also cheaper than peers like Mastercard, which trades above 34 times earnings.
Investors can buy a dominant player in a safe industry that will likely increase its dividend over the long haul, all for a relatively cheap price. With this value proposition, investors might want to scoop up shares.
