A common caveat within the investing community is as follows: "Past performance is not a guarantee of future results." This is certainly true to a large degree. But it is also a fact that winning stocks tend to keep winning, so long as their fundamentals hold up.
A $10,000 investment in the payments processor Visa (V -0.79%) made 10 years ago would now be worth at just shy of $60,000 with dividends reinvested. This is almost twice as much as the $32,000 the S&P 500 index would have returned over the same period for the same investment amount and dividends reinvested.
And assessing the company's fundamentals and valuation, Visa is arguably positioned to continue crushing the S&P 500 index in the years ahead. Let's lay out the case for this argument.
Shifting consumer preferences bode well for the company
In recent years, consumer preferences have shifted dramatically toward the prioritization of convenience as it relates to purchases. A survey conducted in 2019 found that 83% of consumers said convenience while shopping was more important than it was just five years ago. Because consumers are increasingly seeking out convenience in their shopping experiences, alternative payments like credit and debit cards are bound to grow in usage as the years unfold. With its payment network accepted virtually everywhere credit or debit cards are valid payment methods, it's a safe bet that this trend will likely continue to benefit Visa.
The company's net revenue surged 11% higher over the year-ago period to $8 billion during the fiscal 2023 second quarter ended March 31. Several factors contributed to this healthy top-line growth rate.
Visa delivered strong results throughout every aspect of its business. First, the company's payments volume (the total dollar amount of transactions processed on its network) increased at a 10% rate for the fiscal second quarter. Next, Visa's cross-border volume (payments where the issuing country differs from the merchant country) soared 24% in the quarter as more countries reopened their borders and tourists began to travel again. Finally, Visa's total processed transactions climbed 12% due to solid consumer spending during the quarter.
The payments company recorded $2.09 in non-GAAP (adjusted) diluted earnings per share (EPS) for the fiscal second quarter, which was a 17% year-over-year growth rate. Visa's operating expenses rose at a slower rate than net revenue in the quarter pushing up the company's non-GAAP net margin by 150 basis points to a staggering 55% during the quarter.
Looking ahead, analysts believe that Visa's adjusted diluted EPS will compound at 14.1% annually over the next five years.
Image source: Getty Images.
The dividend has nowhere to go but up
Visa's 0.8% dividend yield is about half of the S&P 500 index's 1.7% yield. But for investors willing to tolerate its below-average starting income, the company offers market-beating share price appreciation and robust payout growth.
Based on EPS estimates of $8.55 for fiscal 2023 (ending in September), Visa's dividend payout ratio works out to approximately 21%. This leaves the company with more than enough capital to build out its payments network, repurchase shares, and repay debt. That is why I project that Visa will raise its dividend at a mid- to upper-teens clip annually over the medium term.
A world-class business at a fair valuation
While the broader market has remained flat in the past 12 months, shares of Visa have risen an impressive 11% in that timeframe. Yet, the stock's valuation remains reasonable.
Visa's forward price-to-earnings (P/E) ratio of 23.5 is much more than the credit services industry average forward P/E ratio of 16.7. But the unmatched profitability and the low risk of its business model justify this premium, in my opinion. That's why I'm confident this stock has the ability to make investors richer in the long run.
