There's no denying Visa's (V -0.98%) track record at rewarding its shareholders. It has been a wildly successful investment.
This top financial stock has produced a total return of 472% in the past decade. For comparison's sake, the S&P 500 has generated a 236% total return during the same time.
That track record has resulted in a huge enterprise with a market cap of about $570 billion today. But don't be discouraged. Visa is a business that you should still consider adding to your portfolio. Here are two must-know reasons why.
Outstanding financial position
Visa operates a global card payments network that connects merchants and consumers through their respective financial institutions. The business earns fees anytime it handles a transaction, making for a successful business.
In fact, you'd struggle to find businesses that are more profitable than Visa. Its fiscal 2023 (ended Sept. 30) operating margin of 64% is incredibly high, showcasing how lucrative it is to process card transactions in a scaled manner. Other industry-leading enterprises, like Apple, Nike, and McDonald's, don't even come close to Visa in the profitability department.
Visa has also shown the ability to consistently increase its top line over time. Revenue has increased at an annualized rate of 9.6% in the past five fiscal years, driven by a greater number of cardholders and higher levels of payment volume.
Given that it has minimal capital expenditures, Visa generates robust free cash flow, to the tune of $3.3 billion just in the last fiscal quarter (Q1 2024, ended Dec. 31). Management has decided to use this consistent windfall to return capital to investors in the form of dividends and share buybacks.
Why is it so important to focus on companies that are in pristine financial shape like this? The fact that Visa consistently can increase revenue and earn positive income and free cash flow significantly reduces risk for shareholders. There's almost no chance that this company will ever run into financial troubles, which helps it successfully navigate whatever the economy throws its way. A pandemic, geopolitical turmoil, inflationary pressures, or higher interest rates can't derail Visa. This financial prowess should be catching investors' attention.
Strong competitive standing
Another compelling reason Visa looks like a no-brainer buy right now is its economic moat. This business possesses traits that support its favorable competitive standing.
Network effects are key to Visa's dominance and leading market share in card payments volume. There are 4.3 billion Visa cards in circulation around the globe that are accepted at 130 million merchant locations. Merchants almost have no choice but to accept these cards unless they want to lose sales opportunities. And for consumers, having a card in their wallet that they can use virtually anywhere is valuable.
Visa benefits from the powerful secular tailwind of increasing digital payments. The world is moving further away from cash, which is still a popular form of payment even in a developed economy like the U.S. That translates to sizable growth potential in the decades ahead.
Astute investors will point to the notable rise of various fintech firms during the past decade or so. But it's important to note that despite ongoing innovation in the payments industry, Visa has reported outstanding financial performance. I'm not worried about this company.
If we look at the next five years, I feel extremely confident that Visa can continue its stellar track record of rewarding shareholders. And that makes it a smart buy today.
