Visa (V) is a credit card processing, and the service company is a buy for the total return investor. Visa has steady growth and has plenty of cash flow, which it uses to increase the dividend each year and buy back shares. I think this is an opportunity to buy a great growing business. Visa is 0.5% of The Good Business Portfolio, my IRA portfolio of good business companies that are balanced among all styles of investing. I want to increase the portfolio growth companies, and Visa fits the bill.
As I have said before in previous articles.
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article ” The Good Business Portfolio: Update to Guidelines, March 2020“. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.
When I scanned the five-year chart, Visa has a great chart going up and to the right in a steady, strong slope for all five years with a big drop and recovery from the COVID-19 virus. This is the kind of chart you like to see, strong up and steady. You can use this technique to quickly look for investment opportunities by just looking at a five-year chart. It only takes a minute to see if the business is good and grows during good and bad times.
The method I use to compare companies is to look at the total return. If a company cannot beat the market, why do you want to invest in it? The great Visa total return of 176.33% compared to the Dow base of 63.06% makes Visa a good investment for the total return investor that also wants a steadily increasing income. Looking back five years, $10,000 invested five years ago would now be worth over $26,100 today. This makes Visa a good investment for the total return investor looking back, which has future growth as the United States and foreign demand wants more of Visa’s services.
Dow’s 59 Month total return baseline is 63.06%
Visa does not meet my dividend guideline of having dividends increase for 8 of the last ten years and having a yield of at least 1%, failing this guideline with dividend increases for 12 years but has a low yield. The recent earnings payout ratio is low, at 24% leaving cash remaining for investment in expanding the business and buying back shares. Visa returns a large portion of its cash flow in share buybacks and dividends of $10.77 billion in FY 20. The graphic below shows the amount of cash generated and dispersed to the shareholders, making Visa a cash cow.
Source: Visa Q4 earnings slides
I have capitalization and growth guidelines where the capitalization must be greater than $8 billion and the growth greater than 7%. Visa passes these guidelines. Visa is a large-cap company with a capitalization of $452 billion, well above the guideline target and up $40 billion from my last report. Visa 2021 projected cash flow at $12 billion is excellent, allowing the company to have the means for company growth, increased dividends, and share buybacks. Visa’s S&P CFRA rating is four stars or buy with a one-year target price of $200, passing the guideline. Visa is above the target price at present by 4% and has a high P/E of 36, making Visa a long-term buy at this entry point if you consider the solid growing cash flow that drives the stock price up.
One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is great, and the below-average growing dividend yield makes Visa a great business to own for slow-growing income and good future growth. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying companies that can be understood, makes a fair profit, invests profits back into the business, and also generates a good income stream. Most of all, what makes Visa interesting is the reasonable future growth rate of its business. More and more retail purchases are being made using credit cards both online and in the stores growing the demand for the Visa brand worldwide. The business can’t lose getting 18% – 26% on the credit card balances.
For the last quarter on October 28, 2019, Visa reported earnings that beat expected by $0.02 at $1.12, compared to the previous year at $1.47. Total revenue was lower at $5.16 billion less than a year ago by 16.9% year over year and beat by $70 million from the expected total. This was a mixed report with bottom-line beating expected and the top line decreasing with a decrease compared to last year. The COVID-19 pandemic is the cause of the decrease in revenues but will start to get back to normal as the vaccines soon will be available. The next earnings report will be out January 2021 and is expected to be $1.26 compared to the previous year at $1.46, a decrease. The graphic below shows the earnings summary for the 4th quarter of 2020 YOY. Looking ahead to the 3rd quarter of 2021 is where Visa is expected to start YOY earnings increase. Visa is a SWAN (sleep well at night) investment.
Source: Visa Q4 earnings slides
Visa is one of the largest worldwide credit card services companies. The Company is a retail electronic payment network based on payments volume, number of transactions, and the number of cards in circulation.
From the 4th quarter earnings call. The company started fiscal 2020 off very strong, and then COVID-19 spread across the globe, impacting their business, but they adjusted expenses and continued investing in key initiatives to support and fuel growth. Growth continued in the following areas, acceptance points grew 16% to nearly 70 million merchant locations, U.S. tap-to-pay cards reached $255 million, there were 23 countries that increased their penetration by 25 points or more over fiscal 2019, globally, the number of active credentials in e-commerce excluding travel rose 14% since January, and they expanded wallet partnerships which now represent over $2 billion in potential credentials and nearly 70 million additional potential acceptance locations. From Q3 to Q4, payments volume improved 14 points, process transactions improved 16 points, and cross-border volume improved 5 points. For FY 2021, they expect accelerating their growth through consumer payments, new flows, and value-added services, all while fortifying the key foundation of their business model, brand, security, and technology.
Overall, Visa is a great business with a 13% CAGR projected growth as the worldwide economy grows going forward with the increasing demand for more credit card processing and Visa’s services. The good earnings and revenue growth provide Visa the capability to continue its growth as the business increases by foreign and United States expansion.
The graphic below shows the credit card growth YOY, which is slow right now but will get back to its 13% growth when the COVID-19 virus is controlled, about May-June of 2021. Even in this pandemic, Visa has grown but a bit slower than normal.
Source: Visa Q4 earnings slides
Visa is a great investment choice for the total return growth investor with its well above average total return. The Good Business Portfolio has started a small position of 0.5% in the portfolio, and I intend to add to the position when cash is available. If you want a steady growing good total return in a growing business, Visa may be the right investment for you.
The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to November 27 by 1.57%, which is a gain above the market gain of 4.81% for a portfolio gain of 6.38%. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance. The latest article is titled “The Good Business Portfolio: 2020 3rd Quarter Earnings and Performance Review“. Become a real-time follower, and you will get each quarter’s performance and portfolio companies after the next earnings season is over.
Disclosure: I am/we are long BA, JNJ, HD, EOS, SLP, DHR, LMT, MO, DIS, V, ADP, MDC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.