A longstanding investing credo advocates that you should "let your winners run." The implication of it is, assuming the fundamentals of an outperforming stock remain intact, you should add to your position in it over time.
Payments processor Visa (V 0.05%) indisputably fits into the winner category. A $10,000 investment in the stock made 10 years ago would now be worth $62,000 with dividends reinvested. This is far superior to the $20,000 that the same investment amount would be if it was put into an S&P 500 index fund over the same timeframe.
Even after that decade's worth of outsized growth, patient investors can still grow considerably richer over the long run by buying and holding Visa stock. Here's why.
Secular trends are pushing revenue and earnings upward
If you're like a growing proportion of the population, you probably don't pay for goods and/or services with cash as often as you did in the past. Growth in e-commerce retail sales and a shift away from cash are two elements driving growth in alternative payment volumes. This is precisely why consulting firm Boston Consulting Group projects that the global payments industry revenue will grow at a high single-digit rate annually to top $3 trillion by 2031.
With more than 80 million merchant locations and approximately 4 billion cards in circulation worldwide, Visa is heavily favored to continue to be the biggest beneficiary of these positive industry trends. The company's net revenue surged 12.4% year over year to $7.9 billion for the fiscal 2023 first quarter (ended Dec. 31).
Across-the-board growth in payments volume, total cross-border volume, and processed transactions powered this excellent top-line growth during the first quarter. Even in a challenging global economic environment plagued by lofty inflation and geopolitical instability, Visa's payment volume edged 7% higher over the year-ago period.
With border reopenings around the world due to advances in COVID-19 vaccination rates, more people returned to pre-COVID travel routines. This helped the company's cross-border volumes rise 22% year over year in the quarter. Finally, healthy consumer spending and a recovery in international travel contributed to the 10% growth rate in processed transactions for the quarter.
Visa's non-GAAP (adjusted) diluted earnings per share (EPS) soared 20.4% over the year-ago period to $2.18 during the first quarter. The company's net margin expanded 250 basis points year over year to 57.7% in the quarter. Coupled with a 2.6% reduction in its diluted weighted average share count, this is how adjusted diluted EPS growth far exceeded net revenue growth for the quarter.
Looking out over the next five years, Visa's adjusted diluted EPS growth should remain robust. Analysts forecast 15.5% annual adjusted diluted EPS growth for that time period. This is better than the credit services industry growth outlook of 14.2%.
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A modest payout ratio could fuel massive future dividend growth
Visa's 0.8% dividend yield is roughly half of the S&P 500 index's 1.6% yield. But what the company lacks in terms of immediate income, it makes up for with blistering capital appreciation and dividend growth.
Even after the recent 20% dividend hike, Visa's dividend payout ratio will remain around just 21% for the current fiscal year set to end in September. That is plenty of capital for the company to further improve its payments network, strengthen its financial health, and execute share buybacks. This is why I wouldn't be surprised if Visa keeps handing out similar dividend raises for the next few years.
The valuation is justified
Visa is far from the cheapest stock out there. The stock's forward price-to-earnings (P/E) ratio of 23.8 is meaningfully above the credit services industry average forward P/E ratio of 17.5. But because Visa doesn't assume credit risk like its peers and is consistently the most profitable company in its industry, this premium is earned. This is what makes Visa a no-brainer buy for growth investors.
