Picking high-quality businesses in thriving industries is a proven way to succeed as an investor. A growing industry often translates into growing revenue and profits for its major players, especially if they are quality businesses.
There aren't too many industries with futures as promising as that of the payments processing industry. And Visa (V -1.19%) is the undisputed leader in the industry. But does that make it one of the best dividend stocks on the planet?
Let's dig into Visa's fundamentals and valuation to find out if Visa is the best dividend stock for you.
Visa can likely keep winning
If you're like most consumers in economically developed countries, your predominant payment method is probably not cash like it was just a couple of decades ago. That's because alternative payment methods such as credit/debit cards arguably have more to offer than cash, such as rewards programs, and let you avoid carrying loose change. This is why it's a safe bet that more consumers will adopt alternative payments and use them more frequently in the future. The Boston Consulting Group anticipates that annual global payments industry revenue will surpass $3 trillion by early next decade.
Nobody should benefit more from this trend than Visa, which is the leading payments processor by a wide margin over its next-closest competitor, Mastercard. As of March 31, there were 4.2 billion cards on the former's network compared to 2.8 billion cards on the network of the latter.
As is the case in any industry, size and scale matter greatly. This is especially true within the payments industry. The purchasing power of Visa's cardholders is so massive that merchants are willing to stomach the payment network's high fees to win over business from cardholders.
Due to the company's unbelievable competitive moat, analysts believe that Visa's non-GAAP (adjusted) diluted earnings per share (EPS) will rise by 14.7% annually through the next five years. Put into perspective, that is just ahead of the credit services industry average annual earnings growth forecast of 14.6%.
Image source: Getty Images.
High dividend growth could persist
At first glance, Visa's 0.7% dividend yield isn't exactly exciting. After all, that's less than half of the 1.5% yield that the S&P 500 index offers. But the only reason for this low dividend yield is the company's tremendous stock price growth rate over the past decade. A $1,000 investment in Visa made 10 years ago would be worth roughly $5,500 today with dividends reinvested -- much more than the $3,200 the same investment amount in the S&P 500 would now be worth.
V Total Return Level data by YCharts
For investors seeking remarkable dividend growth, Visa could be one of the best stocks in the world. This is because the company combines above-average earnings growth prospects with a dividend payout ratio set to be around 20% for the fiscal year ending in September. That 20% level means Visa has plenty of room to keep raising its dividend significantly over the next several years without affecting the company's balance sheet significantly.
A sensible valuation for a wonderful business
With the share prices of Visa up 17% year to date, the market has warmed up to the stock in 2023. But the stock still looks to be a decent value at the current $243 share price. This is because the stock's forward price-to-earnings (P/E) ratio is 24.9, compared to the credit services industry average forward P/E ratio of 18.1. That's hardly an unjustifiable premium valuation for a company of Visa's quality. If investors need more convincing, the stock's trailing-12-month (TTM) price to free cash flow (P/FCF) ratio of 28.2 is below its 10-year median TTM P/FCF ratio of 30.7.
