The Federal Reserve has raised interest rates again even as the American consumer is showing enduring strength. Will the rate increases be enough to finally tame inflation? We'll find out soon enough.
Visa (V -0.23%) has been one of the beneficiaries of strong spending. But even if that slows, it is still a top stock to have in your portfolio. Here's why.
Growing with the economy
Visa's performance is typically an indication of how the economy is doing in general. Conditions look a little different than in a standard good or bad economy, which is why the Fed raised interest rates again. Things are turbulent, but consumer spending is still healthy.
And that's been great for Visa. The company continues to demonstrate double-digit percentage revenue growth and post robust profits. It's the largest credit card processing network in the world, with 4.2 billion cardholders worldwide and $14.3 trillion in trailing-12-month processing volume.
When people shop and buy on credit, they use a Visa card more than any other kind.
In its 2023 third fiscal quarter (ended March 31), revenue increased 12% over last year to $8.1 billion, and earnings per share (EPS) rose 25% to $2. Cross-border payments volume increased 17% as people are still getting back to travel after early pandemic restrictions.
Widening its moat
Visa isn't just sitting around reveling in its success. Management is working hard to upgrade its technology, offer new products and services, and forge or expand partnerships to keep its dominant position and reinforce its moat.
On the third-quarter conference call, Chief Executive Officer Ryan McInerney outlined the three growth levers the company has right now: consumer payments, value-added services, and what it calls new flows, which all work together.
For example, client merchants are switching to Visa's consumer payments business because of its value-added services, such as analytics and risk solutions. In fact, revenue from these services increased 19% year over year in the third quarter.
Visa's new flows allow merchants to offer high-level payment services like a fintech would. New flows comprise services like Visa Direct, which is a form of digital payments through the Visa network. Sales from this category increased 20% year over year.
A standout Visa feature
One incredible strength Visa has is its high profit margin, usually above 50%. Converting more than half of your sales into profit is very unusual; most companies don't come anywhere close to that. And although it operates in a high-margin industry, Visa is still head and shoulders above its competitors Mastercard and American Express.
Data source: YCharts.
It also explains why Visa stock carries a premium valuation: 32 times trailing-12-month earnings at today's prices. That's actually below the five-year average of 36, so the stock looks cheap right now.
Don't forget the dividend
Visa pays a growing dividend that at first seems lackluster, with the yield of only 0.72% at the current price, less than half the S&P 500 average of 1.5%. But it's a fast-growing payout, increasing by almost 450% over the past 10 years. That's a great feature for income investors and retirees.
If the Fed's latest interest rate hike works as planned, spending should begin to slow and ease some of the underlying inflationary pressures. That will work against Visa -- but only in the short term. It has a dominant, growing business that would be very hard to displace, and it enjoys the natural tailwinds of a robust economy.
That makes Visa a great stock to own forever.
