Seeking Alpha

Buy Visa For Superior Total Return - Just Look At The Chart

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About: Visa Inc. (V), Includes: BA, DHR, EOS, HD, JNJ, OHI
by: William Stamm
William Stamm
Long only, dividend growth investing, growth at reasonable price, Total Return
Summary

Visa’s 48 month total return is fantastic, beating the Dow 48-month baseline by 96.88%.

Visa’s three-year forward CAGR of 17% is great and will give you growth with the increasing United States and world economy.

Visa’s last quarter earnings(ending September) were great with earnings beating estimate, higher earnings than last year, increasing revenues, and revenue beat.

Visa’s dividends are below average at 0.6% and have been increased for 11 years in a row as a small dividend income addition as part of the total return.

Visa (V) is a buy for the total return investor. Visa has steady growth and 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 0.4% 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 portfolio's growth companies, and Visa fits the bill.

Visa is being reviewed using The Good Business Portfolio guidelines. I use a set of guidelines that I codified over the last few years used to evaluate 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, 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.

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 small dip at the end of 2018. This is the kind of chart you like to see, strong up and steady in good and bad times.

ChartData by YCharts

Visa is reviewed in the following topics below.

  • Investment Fundamentals
  • Company Business
  • Conclusions
  • Portfolio Management Highlights

Investment Fundamentals

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 crucial parameter to see if it fits the objective of the Good Business Portfolio. My total return guideline is that total return must be higher than the Dow's total return over my test period. Visa beats against the Dow baseline in my 48-month test compared to the Dow average. I chose the 48 month test period (starting January 1, 2016, and ending to date) because it includes the great year of 2017 and 2019, and other years that had a decent and weak performance. The great Visa total return of 156.44% compared to the Dow base of 59.56% 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 $29,700 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 48 Month total return baseline is 59.56%

Company name

48 Month total return

The difference from Dow baseline

Yearly dividend percentage

Visa

156.44%

+96.88%

0.6%

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 11 years. The recent earnings payout ratio is low, at 21%. After paying the dividend, this leaves cash remaining for investment in expanding the business and buying back shares. Visa returns a large portion of its cash flow in share buybacks of $8.7 billion in FY 19.

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 2.0% more for a yearly distribution of 5.3% plus an inflation cushion of 1.7%. The three-year S&P CFRA CAGR of 17% is above my requirement, passing my guideline requirement. The good future growth for Visa can continue its uptrend benefiting from the continued strong growth of the United States and world economy.

I have a capitalization guideline where the capitalization must be greater than $8 billion. Visa passes this guideline. Visa is a large-cap company with a capitalization of $408 billion well above the guideline target. Visa 2019 projected cash flow at $13 billion is excellent, allowing the company to have the means for company growth, increased dividends, and share buybacks.

One of my guidelines is that the S&P rating must be three stars or better. Visa's S&P CFRA rating is four stars or buy with a one-year target price of $200, passing the guideline. Visa is below the target price at present by 5% and has a high PE of 30, making Visa a 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 growing income and 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.

I don’t have a guideline for earnings, but look for the earnings of my positions too consistently beat their quarterly estimates. For the last quarter on October 24, 2019, Visa reported earnings that beat expected by $0.04 at $1.47, compared to the previous year at $1.21. Total revenue was higher at $6.14 billion more than a year ago by 13.1% year over year and beat by $60 million from the expected total. This was a good report with bottom-line beating expected and the top line increasing with an increase compared to last year. The next earnings report will be out January 2020 and is expected to be $1.46 compared to the previous year at $1.30, a nice increase. The graphic below shows the earnings summary for the 4th quarter of 2019 with nice gains YOY.

Source: Visa earnings slides

Company Business

Visa is one of the largest worldwide credit card services companies.

As per paraphase 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 the 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 good business with a 17% CAGR projected growth as the United States economy grows going forward with the increasing demand for its services. The good earnings and revenue growth provides Visa the capability to continue its growth as the business increases by buying bolt-on companies and expanding their business in foreign countries.

From the para-phase of the earnings call. The fourth quarter capped another strong year for Visa as they continue to grow their business across a number of dimensions. The fourth-quarter results demonstrate their ability to grow the top line, invest thoughtfully in the business to drive future growth and return capital to shareholders. An important indication relative to the health of their network is transaction growth. In this regard, Q4 ended strongly with over 47 billion payment transactions, an increase of 5.3 billion or 12.6% compared to this quarter last year. Payments volume grew at 9% globally, 10% excluding China. They also saw strong growth in payments volume across every region and growth accelerated versus the last quarter in every international region. Net revenue growth accelerated to 13% or 15% on a constant dollar basis. Non-GAAP EPS growth was 21% or 23% on a constant dollar basis. We also returned $2.7 billion of capital to shareholders in the fourth quarter, consisting of $2.2 billion in share repurchases and $0.5 billion in dividends. For the capabilities and value-added services, they acquired four companies that will help extend the reach of their network and enhance their merchant fraud and tokenization solutions. The organic revenue growth driven by these capabilities at all value-added services exceeded 20% this year. This growth was fueled by the expansion of our issuer processing and network services, an increase in our acquirer and merchant offerings including CyberSource, greater adoption of our risk and authentication tools, and consulting project work. They helped more than 1,000 clients grow their businesses by leveraging insights from our consultants and data scientists. Their strategic focus throughout 2019 and going into 2020 is clear, drive deeper partnerships with traditional clients, expand access with new players, including new sellers, fintechs, neobanks, acquirers and wallets, increased customer engagement by enabling a variety of platforms and simplifying the payment experience, extending value-added capabilities across the ecosystem and enabling new money movement with our network of networks.

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 payment volumes for the last quarter.

Source: Visa earnings slides

Conclusions

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.

Portfolio Management Highlights

The five companies comprising the largest percentage of the portfolio are Johnson & Johnson (JNJ) at 8.1% of the portfolio, the Eaton Vance Enhanced Equity Income Fund II (EOS) at 7.9% of the portfolio, Home Depot (HD) at 9.3% of the portfolio, Omega Health Investors (OHI) at 9.2% of the portfolio, and Boeing (BA) at 12.0% of the portfolio. Therefore, BA, EOS, JNJ, OHI, and HD are now in trim or close to trim position, but I am letting them run a bit since they are great companies.

  • On January 6, I trimmed HD to 9% of the portfolio. HD is a great business but needs more foreign expansion to grow even stronger.
  • On December 5, I wrote covered calls against my Danaher (DHR) position to collect another premium ($1.54/share December $150). I like DHR, but it’s getting a bit pricey, and the covered calls give me some extra income and some downside protection. On December 19, I closed the position by buying back the calls and made a small profit.
  • On August 30, I trimmed OHI to 9% of the portfolio. OHI is a great income business, but it has risks, so 9% is my limit on this company until the operator problems are totally under control.

Boeing is going to be pressed to 15% of the portfolio because of it being cash positive on 787 deferred plane costs at $1.3 billion in the third quarter of 2019, an increase from the second quarter. Boeing has dropped in the last nine months because of the second 737 Max crash, and I look at this as an opportunity to buy BA at a reasonable price. From the latest news on Boeing is a rumor that Warren Buffett is taking a position on BA, maybe he knows a good investment.

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 in April 2019 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 from 1/1/2019 to date by 1.9%, which is a nice gain above the market for the portfolio with BA a strong drag. 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: 2019 3rd 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.

Disclosure: I am/we are long BA, JNJ, HD, EOS, SLP, DHR, LMT, IR, MO, DIS, 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 of the companies are my own.