Visa (V +0.21%) is one of the most recognized brands in the world. It also happens to manage the largest credit card network in the world with the most cardholders (which goes a long way toward explaining its brand recognition). The billions of payment processing transactions it manages helped it generate sizeable revenue and enviable earnings. So it's no surprise that Visa stock has outperformed the market over the past five years.
NYSE: V
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But given that economic conversations over the past several months have included quite a bit of discussion about the growing prospect of a recession in 2023, is Visa stock still a buy?
Why Visa is a powerhouse
Visa takes a small percentage fee every time a cardholder initiates a transaction using its cards. Considering that Visa powers 3.9 billion credit/debit cards, that's a lot of transition processing and a lot of fee generation going on globally every day of the year.
Operating its credit card processing network is Visa's core business. But it has also developed a robust fintech segment that partners with many smaller companies to provide technologically advanced services for its merchant accounts and better features for its cardholders. That microchip you see on your credit card didn't exist just a few years ago, and Visa has done an excellent job of spearheading digital change using that chip in the financial industry.
Visa is a high-margin business. It regularly reports profit margins exceeding 50%. It plows a big chunk of those profits back into developing its business and creating shareholder value through share buybacks and dividends (more on that later).
Does it really follow the economy?
Investors typically see Visa as a great stock because its performance mirrors the economy. Since the economy enjoys growth far more often than it experiences contraction, Visa naturally enjoys a similar growth pattern.
But it doesn't always exactly follow the pattern. What we're seeing at the moment is that Visa is doing better than the broader economy. It endured a setback (along with the rest of the economy) at the beginning of the pandemic when people stayed home and restricted spending. But it rebounded strongly and it's still demonstrating healthy double-digit percentage growth while increased inflation and rising interest rates to combat that inflation has somewhat slowed the broader economy.
What to expect in 2023
Net revenue increased 12% year over year in the fiscal 2023 first quarter (ended Dec. 31), and earnings per share (EPS) increased 21%. The first-quarter revenue growth did slow a bit year over year, so in that way it is beginning to feel the pinch of macroeconomic pressure.
| Metric | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 |
|---|---|---|---|---|---|
| Year-over-year growth | 24% | 25% | 19% | 22% | 12% |
Data source: Visa quarterly reports.
CEO Al Kelly said that Visa is investing in value-added services to meet demand and feels that Visa is well-positioned to keep growing. Kelly is retiring from the CEO role this week, with Visa president Ryan McInerney taking over on Feb. 1. These types of CEO transitions, where the company is well-established and the new CEO has a long history with the company, don't usually make any waves. But it will still be interesting to see if McInerney takes Visa in any unexpected directions.
If we do enter a recession in 2023, as many economists predict, Visa is likely to see further decelerating growth. However, if that does happen, expect it to be a short-term headwind.
Valuation and dividends
Visa isn't a cheap stock. It trades at 33 times trailing 12-month earnings at the current price, which is slightly on the cheaper side of where it typically trades. However, its track record of revenue growth, earnings growth, and cash generation make its stock worth a premium. Visa has a robust share buyback program, and it repurchased 15.6 million shares in the 2023 first quarter alone at a total cost of $3.1 billion. These repurchases make each individual share more valuable.
As for its dividend, its 0.5% yield is underwhelming, although the yield is somewhat depressed because of Visa's recent strong stock price appreciation (up 10% in the past three months). However, Visa's 21% payout ratio means it has plenty of room for future growth and the dividend has growth significantly over the past decade. When compared with some of the more highly regarded dividend stocks, including Coca-Cola (KO +0.28%), Altria Group (MO +0.34%), and Johnson & Johnson (JNJ 0.21%), Visa's dividend growth over time has been absolutely enormous.
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Visa is a top blue chip stock with incredible future growth prospects. It's possible that if we enter a recession this year, its stock price will level off. However, it has shown resilience so far despite the economy, and over the long term, it should continue to create outsized shareholder wealth.
