Led by some of the best companies on the planet, the Nasdaq Composite has created significant wealth in recent years: A $10,000 investment in the benchmark made 10 years ago would now be worth $41,000 with dividends reinvested.
As impressive as this wealth creation has been, there are plenty of individual stocks that have trounced the Nasdaq. Turning a $10,000 investment from 10 years ago into $53,000 with dividends reinvested, Visa (V 0.02%) is one such stock with a track record of outperformance. Here's why I believe Visa stock could be just getting started.
An encouraging industry outlook
It's not a secret that, for years now, there has been an undeniable shift away from cash and toward alternative payments. One of the big reasons for this is the rise of e-commerce, which has prompted many consumers to adopt alternative payment methods like debit cards and credit cards.
Image source: Getty Images.
This trend accounts for how Visa has had such success in recent years: The company's cards in circulation have surged higher by 28% from September 2017 to 4.1 billion for the fiscal year ended Sept. 30, 2022. This has also lifted the number of transactions and the total dollar value of transactions completed.
That explains how total net revenue climbed by just shy of 60% in the past five years to $29.3 billion in fiscal 2022. Improved profitability and a reduced share count from share buybacks led non-GAAP (generally accepted accounting principles) adjusted diluted earnings per share (EPS) to more than double over the past five years to $7.50 in fiscal year 2022.
And the positive trends that helped to produce these strong operating results in recent years don't appear to be fading anytime soon. In fact, Boston Consulting Group expects the global payments industry's revenue to grow at a high-single-digit annual percentage rate from 2021 to $3.3 trillion by 2031.
As Visa's payment network keeps growing in cards, the overall purchasing power of cardholders on its network will rise. To garner business from these customers, more merchants will accept Visa,
perpetuating this virtuous cycle of growth for the payment processor.
Visa also holds a market-leading position in the business, well ahead of No. 2 Mastercard. Because it is so dominant, and its payment processing network so large, it's almost impossible for a challenger to break into the industry much less breach Visa's competitive moat.
That is part of the reason analysts anticipate that the company's adjusted diluted EPS will compound at 14.7% annually through the next five years. For context, that's just ahead of the credit services industry's average annual earnings growth forecast of 14.5%.
Tremendous payout growth can continue
Coming in at about half of the S&P 500 index's 1.6% dividend yield, Visa's 0.8% yield won't stand out for income investors. But with the quarterly dividend per share having quintupled in the past 10 years to the current payout of $0.45, the company's dividend growth profile is enough to turn heads.
Data source: YCharts V Dividend
And since Visa's dividend payout ratio is forecast to come in at less than 21% in the current fiscal year, future payout growth should also be remarkable. This is because such a low payout ratio leaves the company with the funds needed to better its payment network, complete share repurchases, and bolster its balance sheet.
The stock's valuation is more than fair
Shares of Visa look to still be valued within reason. The stock's forward price-to-earnings (P/E) ratio of 27 is much greater than the credit services industry average forward P/E ratio of 16.2. But Visa arguably deserves this premium valuation because its growth prospects are superior, and its business model is less risky because it doesn't extend credit to cardholders.
