Visa: Avoid

| About: Visa Inc. (V)

Summary

Visa has solid fundamentals, which augur well for continued dividend payments and stock buybacks.

However, Visa’s stock is expensive and its low dividend makes it an unattractive dividend play.

Investors looking for a solid dividend play from the financial sector should look elsewhere.

Analysis

Solid Fiscal 2016 Second Quarter. Visa (NYSE:V) had itself a solid Fiscal 2016 second quarter, reporting adjusted earnings of $0.68 per share, a penny better than the 67 cents expected by Wall Street.

Visa's earnings were driven by a 9% increase (in constant dollars) in its revenues, led by a 12% increase in its payments volume growth and a 9% increase in its total processed transactions. On a relative basis, Visa's double-digit payments volume growth was impressive considering that its much smaller, yet highly-touted rival, Square (NYSE:SQ) saw its volume grow by 45%.

How is Visa's growth impressive when it's more than 3 times less? Simple: Visa's total payments volume (during the same calendar period) was $1.3 Trillion compared to just $10.3 Billion for Square - in short, Visa's volume growth alone was bigger than Square's entire transaction base.

Dividend and Outlook. While Visa had a fairly robust first quarter, its dividend investors had hardly anything to crow about. To be sure, the company repurchased 24.2 million shares in the first quarter - but its annual dividend yield is a paltry 0.75% - among the lowest in its industry and less than a fourth of the average for the financial sector. Moreover, with Visa' stock falling by 3.6% in the year-to-date, its dividend provided almost no buffer against capital attrition.

In stark terms, an investor who puts $10,000 in Visa stock can expect just $75 a year in passive income - this just a bit more than half of the yield on comparably safer 10-year US Treasuries and is also less than the yield on 5-year US Treasuries.

To be certain, Visa has the capacity to continue paying its dividend, small as it is. For one thing, Visa has nearly five dollars for every dollar of its short-term liabilities. Indeed, its quick ratio (or the ratio of its cash and equivalents and receivables to its short-term liabilities) is at over three dollars - meaning that its liquid resources alone are enough to cover over 3 years' worth of its annual liabilities.

While Visa's liquidity measures are considerably lower than the average for its industry, it's important to note that payments processing is a cash-intensive business and that Visa is a sector giant, which means that its turnover is much faster than that of a small payments startup. In that regard, it behaves more like a money-center bank. Consequently, a better comparison is with the rest of the financial sector, where its metrics are many multiples of the average.

Visa's financial strength is most evident in its very low debt-to-equity and leverage ratios, which at 0.54-to-1.00 and 0.86-to-1.00, respectively, are many magnitudes smaller than the averages for its industry. Indeed, just looking at Visa's balance sheet, it has around $21 Billion in Cash and Short-Term investments - more than enough to settle its $16.6 Billion in Long-Term Debt.

What's more, Visa paid just $132 million in interest during its fiscal second quarter - far less than the $336 million and $1.73 billion it laid out in dividends and stock buybacks during the period. Clearly, Visa is not in danger of curtailing its dividends anytime soon, especially considering that it expects to generate $7 Billion in Free Cash Flow in fiscal 2016.

Taken in a vacuum, Visa's future prospects are also fairly solid: revenues are anticipated to rise by close to 16% a year over the next half-decade - a rate that is slightly slower than the 17.4% growth expected for its peers but not unimpressive considering its relative size and standing in the industry.

The problem with Visa is that it's expensive: the stock is trading at nearly 26 times its trailing twelve month earnings and at nearly 23 times its forward earnings. Both these measures are higher than the historical and forward P/E ratios for the Dow and the S&P500 - and also that of its industry.

There are also macroeconomic considerations such as Brexit - with approximately 29% of its revenues from cross-border transactions, a slowdown in the UK and, by general osmosis, Europe, would curtail consumer spending and impact Visa negatively, especially since cross-border payment processing was Visa's slowest-growing segment during its fiscal second quarter. A further downside from Brexit would be the slower take-up in electronic payments processing in the region - something that could have been a growth area for Visa in the years ahead.

Conclusion

All things considered, there is little to recommend about Visa as a dividend stock opportunity and

investors would be wise to avoid it for now.

While the Visa does have solid fundamentals and has the financial resources and capacity to continue paying dividends and engaging in stock buybacks, these advantages are offset by an expensive stock price that is prone to macro headline risk and a very low dividend yield. It's hardly worth the bother.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.