Buying and holding stocks whose businesses enjoy significant competitive advantages often works out well for investors. That is because such companies can consistently grow their top and bottom lines year in and year out.
Someone who invested $10,000 in Visa (V -0.48%) a decade ago would now have nearly $53,000 with dividends reinvested. The same invested amount put into the S&P 500 at the same time would be worth almost $33,000 today with dividends reinvested.
While it's true that past performance is no guarantee of future success, Visa's days of beating the market show every indication of not being over. Let's unpack the company's fundamentals and valuation to understand why you'll be glad you invested in Visa stock today.
Visa is churning out healthy growth
Aside from Mastercard, no other payment processor inspires nearly as much confidence from cardholders and merchants as Visa. The California-based payment network processes thousands of transactions every second and is accepted as a payment method at more than 100 million merchant locations around the world. With each transaction, Visa collects a small percentage fee.
Those fees helped Visa's net revenue move upward by 11.7% year over year to $8.1 billion in the fiscal 2023 third quarter (ended June 30). Just like the fiscal second quarter and prior quarters, the company's impressive results were an all-around effort.
Though inflation is slowly fading in many global markets, it remains above pre-pandemic levels. But the good news is that consumer spending remains healthy so far. Given steady consumer spending and increased transaction amounts, it's not surprising that payment volume (e.g., total dollar amount) processed on Visa's network during the fiscal third quarter rose by 9% over the year-ago period. After years of headwinds, a recovery in travel and summer tourism propelled the company's cross-border volume (transactions where issuing card country differs from merchant country) higher by 17% year over year for the quarter. Finally, the total number of transactions processed by Visa's network in Q3 jumped by 10% year over year.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) grew by 9.1% year over year to $2.16 during the fiscal third quarter. Adjusting for unfavorable foreign currency translation resulting from a stronger U.S. dollar, Visa's currency-neutral adjusted diluted EPS surged higher by 11%. The company's non-GAAP net margin dipped a bit to a still amazing 55.4% for the quarter. But this was mostly offset by a reduction in its diluted share count stemming from share repurchases. That explains how Visa's adjusted diluted EPS growth slightly lagged its net revenue growth in the quarter.
As Visa expands its payment network and payment methods to gain market share, the future should remain encouraging. Analysts anticipate the company's adjusted diluted EPS will soar by 14.5% annually for the next five years -- a higher clip than the credit services industry average of 13.9%.
Image source: Getty Images.
A payout with promising growth potential
The S&P 500 index's average 1.5% dividend yield is approximately twice Visa's 0.8% dividend yield. But investors shouldn't forget that the stock has delivered much greater returns. It's also worth mentioning that Visa has more than quintupled its quarterly per-share dividend over the past 10 years to the current $0.45.
Looking out over the next few years, attractive dividend growth should remain the norm. That's because the company's dividend payout ratio is poised to clock in at around 21% for this fiscal year ending in September. That leaves Visa with a buffer to withstand abnormal downturns in its business, further hike the dividend, invest in future growth, and strengthen the balance sheet.
The stock looks enticingly valued
Visa's stock price generated 14% gains so far in 2023. And with its quickly growing earnings, there could be more upside ahead. This is because Visa's shares are trading at a forward price-to-earnings (P/E) ratio of 24.3, which isn't unreasonable against the credit services industry average forward P/E ratio of 18.1. That's why analysts have an average 12-month price target of $273, which represents a 15% upside from the current $237 share price.
