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Visa Inc.: Cash Is King, But Credit's Good Too

Feb. 07, 2016 8:58 AM ETVisa Inc. (V) Stock37 Comments
Passive Income Pursuit profile picture
Passive Income Pursuit


  • High free cash flow and low cash needs lead to excellent returns for shareholders.
  • Continuation of trend towards consumers using cards as well as a rising global middle class will lead to double digit business growth over the next 5-10 years.
  • Visa has provided excellent returns in the past, but are the shares attractive as an investment at current prices?
  • Visa is a Dividend Challenger with 8 consecutive years of dividend growth.

Visa Inc. (NYSE:V) is a wonderful company that few can argue about its quality as a company. The business model is excellent. Just charge merchants a percentage of every transaction with no liability for the customers' ability to pay. It's essentially a financial toll road that has excellent growth prospects moving forward.

I initiated a position in the company in August 2013 and have been more than pleased with the results as they are the 5th best performer in my portfolio as judged by internal rate of return. In that time I've received a dividend return of 1.60% and share price appreciation of 48.05%. That's good for a total return of 49.65% with an internal rate of return of 22.49%. As a dividend growth investor the even better news is that the dividend has been increased by 69.70% since I initiated the position.

Visa is a Dividend Challenger with 8 consecutive years of dividend growth. At a price of $71.56 the current yield is 0.78%.

However, that's what it's done for me in the past and has no bearing on the future. Is there any value in the shares at the current prices?

Business Overview

I want to start off looking at Visa's moat because that's a big factor in determining its financial metrics. Visa's moat is based on its network strength. They are the largest payment processor and credit card network in the world and building out a network to rival Visa's would require a huge undertaking of capital. You would have to convince just about every major bank to use cards with your brand, convince retailers to accept your network, and consumers to use your cards.

With Visa's network already built out they sit in a dominant position. In the first quarter of Fiscal Year 2016 Visa processed 19.0

This article was written by

Passive Income Pursuit profile picture
I started a dividend growth investment strategy a few years ago and am aggressively growing my portfolio to churn out enough dividends to reach financial independence.

Analyst’s Disclosure: I am/we are long V. 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.

I am not an investing professional. Investing involves risks. Please consult a financial professional prior to investing and do your own due diligence. I may add to my position in Visa over the next 72 hours. All charts and images were sourced from my own stock analysis spreadsheet unless otherwise noted.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (37)

A bear market spares no one! Oil is crashing, many banks are holding loans on their books for many oil companies! Go figure!! Oil prices fall, oil companies default. Banks get hurt. This does not look good !!! Houston we have a problem!!!
Byron Clarke profile picture
I liked your chart showing the expected prices at varying PE levels going out.

As you think about what might occur in the future, realize that your various assumptions are linked. If Visa is going to continue to rate a 25x PE ratio, then it will need to continue growing at 16+%.

If Visa's growth stalls, you'll likely have the double whammy of both slowed EPS and a lower PE ratio.

The other interesting scenario to me is the scenario charted out where V grows at 16%, but the PE ratio drops from 25 to sub-20. This would likely occur in a situation where the overall market did the same thing. The Shiller CAPE is 23.4x as of today, with a long-term mean of 16.6x. My expectation is that as interests rates rise back to historical norms, the overall market CAPE will decrease driving flat or possibly even negative equity returns over the next decade. Visa may not be immune to this trend, but I think I'd rather be riding Visa through this sort of market re-trenching than most other companies.

I'm Long V, and interested in picking up a few more shares below $70.
Brian Auty profile picture
There are a couple of ways to play this. Choose your price point and write a put. $60 - $67.50 are OK Mar 16 expiry. The closer to today's price, the better premium obviously. I might be tempted to write an in the money $70 put and then buy a $60 put to prevent an extreme situation from playing out.

Since V is a stock I want to own for a while, I don't think I would consider writing any calls on my position.
Illuminati Investments profile picture
Nice article, didn't realize they were buying back so many shares.

Just put in an order at $60, hopefully it hits that and I can finally own this great company.
Wildstar profile picture
I backed my truck up at $67. I think it is a fantastic opportunity. I already had a position but doubled what I had.
zoralsurgeon profile picture
I don't see any reason for V being down so much today... Anyone else read anything?
Illuminati Investments profile picture
I did see something about Costco's move to Visa cards being delayed, but I wouldn't expect that to have that big an impact because it will happen eventually, so I think it's just part of the general selloff.
Brian Auty profile picture
Big drop today. Not sure it's company specific - was there any news? Mid $60s seems like a really good entry point to me.
somedata1 profile picture
Agreed. I love V and MA. I'm watching closely. I smell fear in investors in this environment. There will be an opportunity later.
Orangejulius profile picture
I'm really curious why V is dropping so much today. Down around 7%. MA is only down 3.2%... I'm tempted to jump in at the mid 60's for a quick trade on recovery, but I'm curious to hear why a dump is happening.
commongoodinv profile picture
My sense is that because the financials sector is getting hammered, so is V. Its nothing company-specific, anyway..
somedata1 profile picture
Why V is dropping like a penny stock?
somedata1 profile picture
I have a tiny position in V and MA, they are starting to look more attractive.
Best analysis I've ever read
Certainly the best analysis by someone wearing a cap.
PghFundManagement profile picture
You don't have to be scared about your Visa holdings. if I were you I'd average down as that stock, V, goes south. It won't be too long though. Visa and Master card are well loved. just look at where the visa stock price is right now. If it were any other company I bet you it would be way lower given all the problems visa has faced, including the loss of Costco, a tremendous company.
Visa has gone beyond American border to European market, BRIC nations, and currently visa is rapidly expanding in the middle east and all Africa.
Recently, December 2015, I was traveling in east Africa and every restaurant, hotel, and shopping centers take more visa cards, than any time before. although cash is still the king in most African and middle eastern nations, cashless purchases is taking a hold, with vengeance! when I saw that, I came back and did a lil research. What I saw proved my thesis, to buy Visa Now (then), then average down whenever visa stock drops 5-10%. I'm keeping that promise. Don't get discouraged. Visa is just having a 'flu' season!
Thanks for the advice. I'll wait for 65 to add more.
Passive Income Pursuit profile picture

V and Costco actually reached an agreement. It was AMEX that lost exclusivity at Costco. Starting March 31, 2016 you can only use V at Costco and AMEX will no longer be accepted there. Visa is one of my highest conviction companies for the next 10-20 years to deliver excellent business growth and shareholder returns.
Passive Income Pursuit,

I just read today that the Visa rollout won't be happening til June...maybe. It seems the data being transferred from AMEX to V is taking longer than anticipated. Long V and looking to add lower.

visa is a great investment. > 5% return is still good compared to lots of others that ate my savings
Passive Income Pursuit profile picture

I suspect V will deliver much better than 5% annualized returns over any reasonable length of time and you'll be quite happy owning shares.
phamp1973 profile picture
long v!
I don't get it. If it is too expensive right now then it's a sell.
Brian Auty profile picture
@tes39 - it can also just be a hold. Too expensive depends on your time horizon and margin of safety requirements. A great company at a fair price can still be worth it. Morningstar has fair value at $104.
I loaded up the truck @76 not too long ago so I'm concerned when I read these posts about V being expensive. I'm long and expect good earnings in the future.
Passive Income Pursuit profile picture

It depends on your own investing style. Personally unless a company I own is gross overvalued, like say KO at a 30 or higher P/E I don't really consider selling. Once I buy stock my preference is to own it for as long as possible as long as the business is performing and the shares aren't a ridiculous valuations.

So the way I see V right now is that it's too expensive to get really excited about it, but it's a decent price if you're looking to start a position, but not so expensive that you would want to sell.

Sometimes just Holding is the best option.

Thanks for the comment.
ChuckXX profile picture
According to "IBES/FIRST CALL" estimates they have 2018 coming in at $3.92 not $3.82. But just setting that aside for a second my bigger concern is this thing called "BlockChain Technology". Anyone who has a big position in Visa like myself as well as my friend Bahamas1 have to continue to keep their ears to the ground as this technology unfolds over the years. Iam more concerned about this than anything out there. Visa is my very largest position by a pretty wide margin. They recently have signed up some really "Major New Accounts". Costco, Sams, USAA, Fidelity, Egyptian Government just to name some of the big acquistions of late. ONE THING that does bother me is the "lack of insider buying". You just never see any. Long Visa. Very "GOOD ARTICLE".
Passive Income Pursuit profile picture

The $3.82 was derived by using the consensus analyst 5 year EPS growth rate and I just compounded it from the 2016 estimate. So it's likely to be different as you pointed out but erring on the side of caution is usually a good thing.

I'm not sure how I feel about blockchain. I could see it taking some market share but in its current form I don't see much of a threat. The big problem for blockchain is the variance in value. Will consumers willingly embrace a currency that could be worth $100 in August 2013, then almost $1,000 in November 2013, then $640 in December 13. The price/value has stabilized more recently but so far in 2016 it's ranged from the $430's to $460's to $360's. Those are huge moves in the value of a currency which would make any kind of realistic planning impossible for the average user in a developed economy with what should be a stable home currency as a viable option that's accepted everywhere. Eventually it could be an issue but I don't see widespread acceptance for a long time if ever.

Just my $0.02.
I stumbled upon the Cash Flow Graph. There is no clear upwards trend neither in OCF nor in FCF in my eyes. I would have suspected a monotonous upwards trajectory for both from V's stellar revenue growth.

I suspect one-time items (2013??) and currency play a role here, can somebody please explain? Thanks! Long V.
Passive Income Pursuit profile picture

The growth is actually pretty solid and I think it could be the scaling that makes it look less impressive. Here's the CAGR from the end of FY 2011 to the end of FY 2015. Revenue - 10.9%, OCF - 14.2%, CapEx - 4.1%, FCF - 15.1%, FCFaD - 12.7%, FCFaDB - 18.1%. So they've actually been improving their cash conversion but like I said I think the scaling makes it looks less impressive than it's actually been.

FX has played a role in the cash flow stalling out over the last couple of years but eventually that should work itself out as the USD loses some strength.

Thanks for the comment.
Sovereign Investment Insight profile picture
Great analysis. I would add in the mid 60s. Too expensive now. Even if they deliver 10% EPS growth for 10 years, it probably barely returns 8% at these valuations.
antiquary profile picture
They're currently retiring 2.5% of shares every year. Over ten years, that'll be one-quarter of all the shares even if the market maintains the current P/E. And they're paying out ~25% of earnings in dividends. And they're retaining some earnings and laying them out on a business with an excellent return on equity. Myself, I find it highly unlikely that returns will only be 10% per year over that time.
Dividend Derek profile picture
Nice analysis, I do wonder if a black swan event could hit this sector. With the transaction fees as high as they are this field is extremely ripe for disruption especially as the large tech players are expanding their mobile payments.

Any thoughts?
Passive Income Pursuit profile picture

I'm more concerned about government caps on the interchange fees than other technologies. I'm curious about your thoughts regarding large tech players. If I remember correctly Apple partnered with Visa for their own payment system which seems like it'd be the biggest risk. GooglePay?, I think that's what they call it, would be a possible disruption due to the large amount of Android phones but they don't really seem to have any traction with getting people to use it. It's not recognized by a lot of places and frankly is just annoying. Paypal would be a possibility as well but I think they run a large chunk of payments through Visa as well, I'd need to research that more.

However the governments ability to drastically reduce V/MA profitability with the swipe of a pen seems like it'd be the bigger intermediate term risk. But like I mentioned in the article the number of transactions and $ of transactions should continue to rise over time to compensate for the lower transaction fees if they're limited.

Thanks for the question.
Brian Auty profile picture
The last time I bought Visa (similar to your timeframe) forward PE was just 17x and TTM was 23x or something like that. I have TTM at 26.7x and forward PE at 22x (maybe our source numbers are different somehow).

Either way, I agree with your assumption that V is a bit expensive, but not too expensive under $70 and we're close to that now. Long term, I would say buy.
Passive Income Pursuit profile picture

I definitely think there will be better opportunities in the future to add shares of V. Although now also looks like a decent time if you're really up for adding shares. Growth and share buybacks will provide enough EPS growth to still provide decent returns.

Regarding the forward P/E ratio yours is the 2017 forward P/E but you're comparing it to my 2016 forward P/E calculation. My 2017 forward P/E is 22 as well.

Thanks for the comment.
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