As you scan the investment landscape, it's hard to find truly exceptional businesses. I'm talking about those that have wide economic moats, long track records of financial success, and sizable growth prospects. Producing outsized returns for shareholders is also part of the equation.
Visa (V -0.48%) fits the bill here. To say the stock has rewarded investors would be an understatement. In the last 10 years, shares are up an eye-popping 400%, crushing the S&P 500 by a wide margin.
There's absolutely no doubt in my mind that Visa is a great company. But investors shouldn't rush to buy it just yet. Here's why.
Visa is a wonderful business
There are several valid reasons to love Visa's business. One of the most obvious is Visa's strong competitive position. There are 4.2 billion Visa cards in circulation across the globe, with 100 million merchant locations accepting them as payment. The network processed a whopping $14.3 trillion in volume in the last 12 months.
These figures demonstrate just how ingrained Visa is into the fabric of the global economy. In other words, Visa is ubiquitous to the point that we don't even think about it when swiping our credit cards for daily purchases. It would be almost impossible for any rival to disrupt this situation. And it makes Visa a smart investment, in my opinion.
Additionally, having so many cards and merchants using Visa creates powerful network effects. People have no choice but to keep these cards in their wallets because they are accepted everywhere. And merchants don't want to risk losing business from customers, so they have to accept Visa cards at the point of sale.
We can also look at Visa's outstanding financials. In fiscal 2022, the business posted a ridiculous operating margin of 64%. Moreover, Visa generates a ton of free cash flow (FCF). Last year, it produced $17.9 billion of FCF on $29.3 billion of revenue. Because there are almost no capital expenditure requirements, Visa can basically print money.
Realizing that it doesn't need a lot of capital to grow, management has done a good job returning cash to shareholders. Visa's current dividend yield of 0.72% might not be impressive, but the business has consistently increased the quarterly payout since going public in 2008. The leadership team also conducts sizable share repurchases.
Investors should be patient
Readers can now appreciate just how great a company Visa really is. Once armed with this new information, the immediate reaction is probably to go out and quickly buy this financial stock. But I'm not sure if this is the right move.
Visa has been an outstanding investment, and everyone already knows how wonderful a company it is. So, its shares are rarely trading at a meaningful discount. As of this writing, they sell for a price-to-earnings (P/E) ratio of 31.7. And in the last 10 years, the stock's average P/E multiple was 33.5.
The S&P 500 currently trades at a P/E ratio of 19.6. This makes Visa's current valuation look very expensive by comparison.
Quality matters when choosing what investments to make. But valuation matters as well. After looking at Visa's P/E multiple, it's completely understandable that prospective investors might wonder where the outsized returns could come from going forward.
But one could make the valid argument that historically, Visa shares have mostly sold at what appeared to be a premium valuation. And the stock has clearly outperformed the broader index over the long term.
So, if you're an investor who appreciates a high-quality business and cares less about its current valuation, then it might be a good idea to dollar-cost average into Visa over the next six to 12 months to take advantage of different price points.
