A few years ago, Visa (V) launched its initial public offering, the largest in US history. Since then, Visa has been growing strongly, generating strong returns for investors.
Visa's operating revenues increased from $6.91 billion in 2009 to $8.07 billion in 2010, and then to $9.19 billion in 2011. This translates into a growth of 33% in two years. In a similar vein, the company's net income increased from $2.12 billion in 2009 to $2.89 billion in 2010, and to $3.53 billion in 2011, accounting for a two-year growth of 67%. Since 2009, the number of Visa cards increased from 1.7 billion to 1.9 billion. The number of transactions on these cards increased from 39.9 billion to 50.9 billion. The total volume on these cards also increased from $4.3 trillion to $5.9 trillion during the same period. But what is even more impressive is that this strong growth was posted even as the global economy was slowing.
There are multiple avenues of future growth for Visa. One of these growth avenues is emerging markets. By 2015, the company will derive 50% of its earnings from the international markets. Currently, there are many countries that are moving from using cash and checks to using credit and debit cards in trading. Some of these countries include China, Russia and India, where Visa sees and will continue to see strong growth. International growth is especially important for Visa due to increased regulations in the US that limit the transaction fees the company can earn from its debit cards.
Another growth avenue for Visa is next-generation payment technologies. Visa's acquisition of CyberSource, PlaySpan and Fundamo will play a major role in the company's growth in this area. Visa currently offers ecommerce and mobile payments to customers, and plans to expand breadth of these solutions for growth. In 2010, 3% of online purchases were made by mobile payments, whereas in 2011, this number jumped to 10%. If the trend continues, by 2020, at least half of all online payments will be done through mobile devices.
Visa's mobile payment system helps individuals in Africa and Middle-East without a bank account to issue payments. Further growth for the company will come from its partnerships with PayWave, Google (GOOG) Wallet, AT&T (T), T-Mobile and Verizon Wireless (VZ). The company signed 15 partnerships in Canada in 2011, and moving forward, these partnerships are expected to double Visa's transaction volume in a few years. In Brazil, Mexico, Japan, China and India, the company signed additional partnerships with many national and local banks. This will also fuel the company's growth strongly.
Sharing the wealth with stockholders
In the last year, Visa spent $3.6 billion in dividends and stock repurchases. I believe this may signal a red flag, as this number is dangerously close to the company's full year earnings. The company basically returned all of its 2011 earnings to its shareholders. I would rather a growth company keep some of its earnings and invest in future growth, rather than hand in all its earnings to shareholders. The company's current dividend yield of 0.74% is nothing to write home about, but it's still better than nothing.
Visa primarily competes with Mastercard (MA) and American Express (AXP) globally. These two companies are innovative, growth driven, and very competitive. In a rapidly globalizing world, there is room for all three companies to see strong growth. Apart from Mastercard and American Express, there isn't a third company big enough to hurt Visa's growth prospects. However, keep in mind that Paypal and Google Wallet may become serious competitors in the years to come.
Of the 31 analysts covering the stock, 22 rate it as a strong buy, three rate it as buy, and six rate it as hold. Analysts are predominantly in favor of Visa. The average price target on the company is $126, giving it an upside potential about 10%. In 2012, the company is expected to grow its earnings by 20% and in the next five years, it is expected to grow its earnings at an annual rate of 16%.
Visa is taking the right steps to grow in the future. The company currently has a P/E ratio of 23, and while this may seem too high to many, if the company keeps growing like it is expected to, its P/E ratio will drop to 20 by the end of 2012, 17 by 2013, and 14 by 2014. Despite its giant size, Visa is still a fast growing company. Investors looking for a strong growth stock, with relatively low risk, will definitely benefit from including it in their portfolio.