In today's fast-paced and consistently changing financial landscape, knowing which stocks offer solid investment opportunities and which are just fads is crucial. One company that's stamped itself as a staple in the finance world is Visa (V 0.50%).
Visa is the largest payment processor in the world and has been key in changing how people make transactions. Visa's market position has brought it lots of investor attention, making it a hot topic in many investing circles. If you're wondering if Visa is a buy, the answer is an overwhelming yes. Here's why.
Solid profit margins
Visa has officially established itself as a cash cow with its revenue over the past decade. Its Q3 (ended June 30) revenue reached $8.1 billion, up 12% year over year and just under 60% more than three years ago.
Compared to competitors like Mastercard, Discover, and American Express (AMEX), Visa's revenue isn't jaw-dropping (it's lower than American Express' but higher than Mastercard's and Discover's), but where other companies pale in comparison is profit margins.
V Revenue (Quarterly) data by YCharts.
Visa makes money by taking a percentage of every transaction on its payment network. Luckily for Visa, the investments it took to build out this network have already been made. That means the company is now able to reap the fruits of past investments without incurring too many present-day expenses.
Regardless of industry, you'll be hard-pressed to find a company whose margins compare to Visa's. Having such high margins leaves Visa with ample free cash flow to use for research and development, acquisitions, dividend payouts, and other things that contribute to shareholder value over the long run.
An underrated dividend stock
Most people don't think about dividends when they think about Visa as an investment. With a dividend yield routinely under 1% (currently 0.77%), it makes sense that that's the case. However, Visa should get credit for its dividend and how much it has increased it.
Visa declared its first dividend in June 2008 and has increased it every year since. Its $0.0263 June 2008 payout to the current $0.45 payout represents an increase of over 1,600% -- a much higher increase rate than most competitors and Dividend Kings over that span.
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Key Data Points
Considering Visa's payout ratio is only 21%, there's plenty of room for dividend increases as well as other means to return shareholder value, like stock buybacks. In the past two years alone, Visa has spent over $22 billion on stock buybacks. That's decreased its outstanding shares and helped boost its earnings per share (EPS) by more than double to 2.0.
There's no need to overcomplicate it
Sometimes, deciding if a stock is worth the buy comes down to a few questions:
- Does the company have a competitive advantage?
- Does the company have a strong balance sheet?
- Is this a company you feel comfortable holding on to for the long haul?
In Visa's case, the answer is yes for all three.
Visa's competitive advantage is its vast reach. As of the end of last year, Visa has over 100 million merchants globally on its network. That's far, far more than even the second-closest competitor, Mastercard. Due to Visa's network effect, this reach won't be matched anytime in the near future, either.
Visa's balance sheet and free cash flow are rock solid, with plenty of room for future investments and shareholder returns. And as it stands, a large part of the world is still underbanked and cash-dominant. That means Visa has plenty of room to expand its reach and help usher in the new era of the digital economy.
Few companies, regardless of sector or industry, are as well positioned for sustained success as Visa.
