Warren Buffett is one of the most accomplished investors in modern history, with a net worth of over $130 billion. Buffett and his partners have made Berkshire Hathaway a symbol of investing success and one of the top companies in the world.
Berkshire Hathaway's stock portfolio consists of over 50 stocks covering many sectors. However, one of the companies that I'm all in on is Visa (V 0.41%). Visa accounts for less than 1% of Berkshire Hathaway's stock portfolio, but it's a company with a competitive advantage that gives it great longevity. Let's see why.
NYSE: V
Key Data Points
A reach that's beyond its competitors'
Visa's biggest competitive advantage is its reach. It has around 4.4 billion cards in circulation and is accepted by over 130 million merchant locations. Those numbers far exceed those of competitors like Mastercard, American Express, and Discover, and those competitors likely won't catch up anytime in the foreseeable future.
A large part of the reason is the network effect. Merchants are incentivized to accept Visa because it's the most common card used globally, and prospective cardholders have an incentive to go with Visa because it's the most accepted card globally. Going a different route would risk turning away customers, or being unable to use your card in certain places.
As someone whose first credit card was a Discover card, I can attest to the latter point being a pain and the driving force behind ensuring my second credit card was a Visa.
As middleman, Visa operates with fewer risks
Visa has a lucrative "middleman" business model. Although you may see Visa's brand on cards, it doesn't actually issue cards or offer credit to consumers. Instead, it operates the payment processing network and charges a fee each time a Visa card is used. This allows it to function without taking on the financial risk of issuing credit. If someone doesn't pay their credit card payment, it affects the issuing financial institution, not Visa.
Being an asset-light business also contributes to Visa's lofty margins. Its gross profit margins are routinely over 80%, with profit margins -- which considers taxes, interest, and other non-operational expenses -- well over 50%.
V Profit Margin data by YCharts
With impressive profit margins, it's no wonder Visa is a certified money-maker. In the second quarter, Visa made $8.8 billion in revenue, up 10% year over year. Much of this is courtesy of the 8% increase in payment volume and the 11% rise in processed transactions.
As global payments shift away from cash, Visa should continue to be one of the more pivotal players in the payment space, and its growth should reflect that position.
Returning shareholder value in other ways
There's no doubt Visa has growth potential, but the company has done a great job returning shareholder value in ways other than stock price growth. In the past year, Visa has spent over $12 billion on stock buybacks, including over $2.7 billion in Q2 and $6 billion year to date.
V Stock Buybacks (Quarterly) data by YCharts
Stock buybacks help investors by decreasing a company's outstanding shares and increasing its earnings per share (EPS). They can also give investors confidence that a company's management believes its stock is being undervalued compared to its true value.
Aside from stock buybacks, Visa has used dividends to return shareholder value. Visa's quarterly dividend is $0.52 per share, with a dividend yield of around 0.75%. It's modest, but the dividend is an additional benefit to shareholders. Over the past decade, Visa's stock price has increased by 453%. Add in the dividend, and the total returns increase to 493%. That's an extra $4,000 on a $10,000 investment over that span.
Visa's stock is priced at a premium
One drawback of Visa's stock is its premium price. Its price-to-earnings (P/E) ratio is over 30, which is higher than the S&P 500's (around 25) and enough to earn it the "expensive" label by many investors' standards. Still, it's below Visa's average P/E ratio for the past five years.
V PE Ratio data by YCharts
Regardless of Visa's current valuation, long-term investors shouldn't be deterred from investing in a great business. It's a company in a great position to be a market leader for quite some time in a constantly evolving space. Buffett has routinely said that he doesn't buy great stocks, he buys great businesses -- and that's exactly what Visa is.
