Warren Buffett, whom many consider the greatest investor of our time, holds more than 50 stocks in Berkshire Hathaway's portfolio, his holding company. Out of all these investments, I'm eying financial services company Visa (V -0.23%) as a long-term winner.
First, it's a proven winner that has generated total returns of 1,690% since its IPO in 2008, shredding the S&P 500 over that time. Additionally, it's a textbook Buffett stock that offers investors fantastic business fundamentals at a fair valuation today.
Here's why retail investors should be circling Visa's stock for their long-term portfolios, too.
A stock that fits Buffett's style
Buffett has built a remarkably successful investing career by identifying simple but high-quality businesses, investing in them at attractive prices, and holding onto those positions for long periods. Consider the simplicity of Berkshire Hathaway's most significant equity holdings such as Coca-Cola, Apple, and American Express. All of those companies have straightforward business models that have helped them resist threats from competition over the years.
Visa, in which Berkshire Hathaway holds a $1.9 billion position, fits that simple mold. The company operates a payment network that sends information back and forth between merchants where you swipe your payment card and the financial institutions that hold your money. Think of Visa as a financial toll road operator that takes a small percentage of each transaction in exchange for moving your money from place to place.
It operates the world's largest payment network (40% global market share), which gives it a competitive moat because that degree of pervasiveness almost requires most merchants to use the network, and it makes little sense for them to support many others. That's why only Visa and a small handful of others (primarily Mastercard, American Express, and Discover) successfully operate payment networks.
Showing Buffett the shareholder rewards he likes
Buffett likes companies that generate enough profits to distribute some to shareholders, either through stock buybacks or dividends. In his latest annual letter to Berkshire shareholders, he wrote: "When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)."
Visa probably hasn't disappointed Buffett in that context. The company has steadily lowered its share count over the years by spending billions of its profits on stock buybacks.
Shares outstanding are down by more than 18% over the past decade as a result, meaning Buffett's shares of Visa (and your shares, too) steadily represent increasingly larger ownership interests in the business. Visa has also raised its dividend payouts for 15 consecutive years.
V Stock Buybacks (TTM) data by YCharts.
How does Visa pay for all this? The business turns 61% of its revenues into free cash flow. That's a staggeringly high percentage, and shows that Visa doesn't need to invest much into its business to continue operating and growing. That potent combination can make for great investment returns over the years.
Strong growth at a fair price
So, if we agree that Visa's a great business, what about the price you're being asked to pay? Shares are trading near the upper end of their 52-week range, but that doesn't necessarily spell bad news.
Analysts on average expect Visa's earnings per share to grow at an annualized rate of almost 15% over the next five years. In other words, Visa should continue growing its profits at a pretty swift pace. At the same time, it trades at a forward price-to-earnings ratio of 26. Dividing that into its expected growth rate into the other produces a price/earnings-to-growth (PEG) ratio of about 1.7. The PEG ratio tells us how much we're paying for Visa's earnings growth, and while some might consider 1.7 high (a stock with a ratio of 1 is generally viewed as fairly valued), Visa, with its dominant market share and strong cash generation, arguably warrants a premium valuation.
Consider that Coca-Cola currently trades at a PEG of 3.5. Comparatively, one could argue that Visa is a much better buy.
V EPS LT Growth Estimates data by YCharts.
Visa has a wonderfully profitable business that should continue growing steadily as people worldwide continue to pay for purchases with cash less frequently. Statista estimates that the number of global cashless payments annually could nearly double from its current 1.1 trillion by 2026. The company is primed to benefit from this long-term trend, and investors should see this reflected in their long-term portfolios as satisfying investment returns. Buffett would be proud.
