Visa: Buy The Dip, Best Of Breed Financial Payments Company With Great Total Return

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About: Visa Inc. (V), Includes: ARNC, BA, DLR, EOS, FCX, HD, HPQ, O, OHI, SLP
by: William Stamm
Summary

Visa's total return over-performed the Dow average for my 53-month test period by 51.31%, which is great, and makes up for the low yield of 0.6%.

Visa's three-year forward CAGR of 17% is great and will give you good growth with the increasingly growing world economy and population and is defensive in this trade war period.

Earnings for Visa last quarter (ending March) were good with earnings beating estimates, higher earnings than last year, increasing revenues and revenue beat estimate with projections for more growth to come.

Visa (V), a payments technology company that connects consumers, merchants, financial institutions, businesses, strategic partners and government entities to electronic payments, 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 at a discount. Visa is 0.4% 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 portfolios growth companies, and Visa fits the bill.

When I scanned the five-year chart, Visa has a good chart going up and to the right in a steady, strong slope for all five years with a small dip at the end of 2018. This is the kind of chart you like to see, strong up and steady.

Chart Data by YCharts

Fundamentals of Visa will be reviewed on the following topics below.

  • The Good Business Portfolio Guidelines
  • Total Return and Yearly Dividend
  • Last Quarter's Earnings
  • Company Business
  • Takeaways
  • Recent Portfolio Changes

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 the guidelines, please see my article "The Good Business Portfolio: Update to Guidelines, August 2018." 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.

Good Business Portfolio Guidelines

Visa passes 10 of 11 Good Business Portfolio Guideline, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

  1. Visa does not meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield, with 10 of the last ten years of increasing dividends and a 0.6% yield. Visa is, therefore, a poor choice for the dividend income investor. The 5-year average payout ratio of dividends is low at 21%. After paying the dividend, this leaves cash remaining for investment in expanding the business, increasing the dividend and buying back shares.
  2. I have a capitalization guideline where the capitalization must be greater than $10 Billion. Visa easily passes this guideline. Visa is a large-cap company with a capitalization of $351 Billion. Visa's 2019 projected cash flow at $12 Billion is good, allowing the company to have the means for company growth and buying back shares. Visa in 2018 bought back $8.5 Billion of shares.
  3. I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The three-year forward CAGR of 17% exceeds my guideline requirement. This good future growth for Visa can continue its uptrend benefiting from the continued growth in the worldwide economy.
  4. My total return guideline is that total return must be greater than the Dow's total return over my test period. Visa passes this guideline since the total return is 95.87%, more than the Dow's total return of 44.56%. Looking back five years, $10,000 invested five years ago would now be worth over $31,600 today. This makes Visa a great investment for the total return investor looking back, that has future growth as the world economy continues to grow.
  5. One of my guidelines is that the S&P CFRA rating must be three stars or better. Visa's S&P CFRA rating is four stars or buy with a target price to $182, passing the guideline. Visa's price is presently 13% below the target. Visa is under the target price at present and has a relatively high PE ratio of 28, making Visa a fair buy at this entry point with steady growth to continue for the long-term investor. Take advantage of this trade war downdraft and buy a quality company at a good price.
  6. One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is great and makes Visa a good business to own for growth long term while the small dividend yield gives you some income. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, make a fair profit, invest profits back into the business and also generate a fair income stream. Most of all what makes Visa interesting is the potential long-term growth of the economy and world population giving you a growth investment with a company that has a growing demand going forward. Further expansion into foreign countries will drive company growth.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Visa strongly over-performs against the Dow baseline in my 53-month test compared to the Dow average. I chose the 53 month test period (starting January 1, 2015, and ending to date) because it includes the great year of 2017, and other years that had a fair and bad performance. The great total return of 95.87% makes Visa a great investment for the total return investor. Visa has a below average dividend yield of 0.6% and has had increases for 10 of the last ten years, making Visa a poor choice for the dividend income investor.

DOW's 53 Month total return baseline is 44.56%

Company name

53 Month total return

The difference from DOW baseline

Quarterly dividend percentage

Visa

95.87%

51.31%

0.6%

Click to enlarge

Last Quarter's Earnings

For the last quarter on April 24, 2019, Visa reported earnings that beat expected by $.07 at $1.31, compared to last year at $1.11. Total revenue was higher at $5.49 Billion more than a year ago by 8.3% year over year and beat expected revenue by $30 Million. This was a good report with the bottom line beating expected and the top line increasing with a good increase compared to last year. The next earnings report will be out late July 2019 and is expected to be $1.33 compared to last year at $1.09 a good increase.

The graphic below gives a summary of the first quarter results.

Source: Visa 2nd quarter earnings call slides

Business Overview

Visa is the largest credit card servicing company in the United States and foreign countries.

As per excepts from Reuters:

Visa, is a payments technology company that connects consumers, merchants, financial institutions, businesses, strategic partners and government entities to electronic payments.

The Company operates through payment services segment. The Company's transaction processing network facilitates authorization, clearing, and settlement of payment transactions and enables to provide its financial institution and merchant clients a range of products, platforms, and value-added services.

The Company is a retail electronic payment network based on payments volume, number of transactions and the number of cards in circulation.

Overall Visa is a great business with 17% CAGR projected growth as the worldwide economy grows going forward with the increasing demand for more credit card processing. The good earnings and revenue growth provides Visa the capability to continue its growth as the business increases by foreign expansion.

The graphic below shows the growth of the payments for the last quarter.

Source: Visa 2nd quarter earnings call slides

The Fed has kept interest rates low for some years, and on December 19, 2018, they raised the base rate of 0.25%, which was expected. I believe that they will go slow in 2019, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States growth going forward with better economics for the consumer. At the March 20 meeting, the Fed lowered United States GDP projection for 2019 which they said are getting to neutral on the economy, projecting no rate increases for 2019. The Fed meeting statement was a wait and see and a bit more dovish than the last meeting. At the May 1 meeting, they did not raise rates and keep them the same.

From April 24, 2019, earnings release Alfred F. Kelly, Jr. (Chief Executive Officer) said:

The company continued to perform well in the second fiscal quarter with approximately 47 billion transactions on the Visa network, driving $2.8 trillion in total volume. Revenue growth was over 8%, slowing versus last quarter as expected, due to 1.5 points of FX drag, lapping high currency volatility last year and slower cross border growth. This was in line with our expectations.

Payment volume growth was 8% on a constant dollar basis. However, growth was 10%, excluding China, and the impact of processing days and US credit conversions. Growth in the US, the UK, and China drove most of the growth difference versus last quarter. As you saw in the numbers reported by the US banks over the last two weeks, processing days and the shift of Easter impacted the numbers. That said, volume growth in many markets around the world was still quite attractive. Growth in our CEMEA region was 22%, and Latin America grew 14%. Also, sub-regions like India, Southeast Asia, Central Europe, and Eastern Europe all were growing at mid-teens or better.

Process transaction growth was 11%, consistent with last quarter. Growth remained strong in our large tap to pay markets such as Australia, Canada, and the UK. Cross border growth on a constant dollar basis was 4%, slowing three percentage points from last quarter. Adjusting for the e-commerce platform reorienting acquiring within Europe for the cross border to domestic and cryptocurrency purchases last year, growth was 6%. And growth improved moderately throughout the quarter.

Expense growth was 7%, slowing to the mid-single digits as expected. Growth was primarily driven by personnel related additions focused on critical business building initiatives. EPS growth was 17%. When we look year to date, we've had strong performance posting 11% growth in revenue and 19% growth in EPS for the first half of the year.

This shows the feelings of top management for the continued growth of the Visa business and shareholder return with an increase in future growth. Visa has good constant growth and will continue as the world economy grows.

The graphic below shows the guidance for 2019 for the company growth.

Source: Visa 2nd quarter earnings call slides

Takeaways

Visa is a great investment choice for the total return growth investor with it's well above average total return. The Good Business Portfolio has started a small position of 0.4% of the portfolio and intends 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.

Recent Portfolio Changes

I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio so I can invest in good companies on my buy list.

  • On May 6 added to the position of Digital Reality Trust (DLR) from 3.40% of the portfolio to 3.60%. I will add slowly to this position as available cash allows and want to get it to 4% of the portfolio, a full position.
  • On April 22, sold all of the remaining Hewlett Packard position. The last earnings report was poor, and future growth looks weak at 2%, time to sell HPQ for a better business.
  • On March 26, trimmed position of Hewlett Packard from 1.0% of the portfolio to 0.6%. The last earnings report was poor, and future growth looks weak at 2%, time to sell HPQ for a better business.
  • On March 22 added to position of Simulation Plus (SLP) from 0.45% of the portfolio to 0.60%. I will add slowly to this position as available cash allows.
  • On March 13 increased position of Realty Income Corp. (O) to 0.85% of the portfolio, I could use a bit more steady monthly income.
  • On March 12 the portfolio closed out the position of Arconic (ARNC) , I only have one more commodity play Freeport McMoRan (FCX) that I think will go up over time.
  • On March 11 the portfolio reduced the position of Arconic from 0.4% of the portfolio to 0.3%. I will sell the rest of this position within the month. The dividend was just cut, and forward growth is under-par.
  • On March 7 added to position of Simulation Plus from 0.33% of the portfolio to 0.45%. I will add slowly to this position as available cash allows.
  • On March 4, trimmed position of Hewlett Packard (HPQ) from 1.3% of the portfolio to 1.0%. The last earnings report was poor, and future growth looks weak at 2%, time to sell HPQ for a better business.
  • On February 28, trimmed position of Boeing (BA) from 16.1% of the portfolio to 15.8%. I love Boeing, but you have to have diversification.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The five top percentage of the portfolio companies in the portfolio are, Johnson & Johnson is 8.1% of the portfolio, Eaton Vance Enhanced Equity Income Fund II (EOS) is 8.2% of the portfolio, Home Depot (HD) is 9.4% of the portfolio, Omega Health Investors (OHI) 8.1% of the portfolio and Boeing (BA) is 13.4% of the portfolio. Therefore BA, EOS, JNJ, OHI, and Home Depot are now in trim position, but I am letting them run a bit since they are great companies.

Boeing is going to be pressed to 15% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expected at $2.64. Farnborough Air Show sales in dollar value just beat out Airbus by about $6 Billion, and both companies had a great number of orders. Boeing received an order for 18 more KC-46A planes. The second quarter 2018 earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write off expense on the KC-46 which has started delivery in 2019. Eight KC-46A tankers have been delivered YTD for 2019. Boeing has dropped in the last 6 weeks because of the second 737 Max-8 crash, and I look at this as an opportunity to buy BA at a reasonable price. This is just my opinion.

JNJ will be pressed to 9% of the portfolio because of its defensive nature in this post-Brexit world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did nothing. JNJ has just increased the dividend to $0.95/Qtr., which is 57 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

The total return for the Good Business Portfolio is ahead of the DOW average YTD by 4.70% which is a nice gain above the market for my portfolio. Each quarter after the earnings season I write an article giving a complete portfolio list and performance, the latest article is titled “The Good Business Portfolio: 2018 4th Quarter Earnings and Performance Review.” Become a real-time follower, and you will get each quarter's performance after the next earnings season is over in a few weeks.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, EOS, LMT, O, HPQ, SLP, DHR, 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.

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 on the companies are my own.