October 4, 2022

Castlow

Be INvestment Confident

Why The Visa Stock Should Be Part Of Your Investment Portfolio For Retirement (NYSE:V)

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Investment Thesis

  • Visa (NYSE:V) has an annual dividend growth rate over the last 5 years of 17.91% and a low payout ratio of just 21.54%.
  • The company’s characteristics make Visa attractive for dividend income investors seeking dividend growth stocks and for investors with a long investment horizon aiming to invest for their retirement.
  • I rate Visa as a buy, due to the company’s strong brand image, its economic moat and high profit margins, as well as its current valuation.

Company Results in 2Q22

Visa’s net revenues in 2Q22 was $7.189 billion. This is an increase of 25% in comparison to the same quarter of the previous year, in which Visa generated a revenue of $5.729 billion. Visa’s operating income was $4.802 billion in 2Q22, compared to $3.581 billion in 2Q21. This results in an increase of 34%. The company’s net income was $3.647 billion in 2Q22, up by 21% in comparison to the previous year, in which the net income was $3.026 billion. Visa’s strong results from 2Q22 are evidence of its robust and stable business model.

Earnings per share were $1.7 in 2Q22, up 23% in comparison to 2Q21 ($1.38). The fact that Visa was able to increase its earnings per share by 23% in 2Q22 in comparison to 2Q21, indicates that the company can be particularly attractive for dividend income investors seeking dividend growth stocks as well as for investors with a long investment horizon aiming to invest for their retirement.

Visa’s Competitive Advantages

Visa is ranked at position 18 on the Forbes list of the most valuable brands in the world. Competitor American Express (AXP) is at position 28 and Mastercard (MA) is 38. Visa is ranked as the most valuable brand within the financial service industry. This ranking is an expression of the company’s successfully built brand image, the strength of which provides a major competitive advantage.

At the end of 2020, Visa had issued a total of 3.586 billion cards. This puts them ahead of Mastercard (with 2.334 billion cards issued at the time) and well ahead of American Express (with 112 million cards issued). The high number of credit and debit cards issued represents another competitive advantage for Visa and is further evidence of its excellent market position.

Visa earns a proportion of 0.2% of the generated revenue by its Visa credit cards and the company is a beneficiary of the trend towards cashless payment. Due to the fact that the technical costs of processing payments have increased less rapidly than the company’s revenues, Visa has managed to increase its profit margins year after year.

The graphic below illustrates that Visa has been able to raise its EBIT-Margin continuously in recent years. This is further evidence of the company’s strong position within its industry.

Visa's EBIT Margin

Source: Seeking Alpha

Despite the high profit margins when compared to other industries, it is hard for Visa’s competitors to enter into the market. Visa’s reliable payments network, the company’s technological knowledge as well as its broad network within the financial service industry in combination with a strong brand image, protect the company from additional competitors entering the business segment.

Furthermore, Visa continuously invests in smaller payment providers who possess technologies for the implementation of electronic payments. This gives the company additional growth potential. In June 2021, for example, Visa acquired Tink AB, a European open banking platform.

In addition to that, Visa can be considered as a beneficiary of inflation. Due to the fact that the company earns 0.2% of its credit cards generated revenue, Visa can even benefit from higher consumer prices. This makes Visa a particularly appealing investment in today’s high inflation environment.

I expect Visa to be able to maintain its excellent market position within the financial service industry due to the company’s strong competitive advantages.

Valuation

Discounted Cash Flow (DCF)-Model

In terms of valuation, I have used the DCF Model to determine the intrinsic value of the company. The method calculates a fair value of $264.91 for Visa. At the current stock price, this results in an upside of 33%.

The Seeking Alpha EBIT Growth (FWD) Rate of Visa is 16.19%. I have decided to make more conservative assumptions and therefore, I assume an EBIT Growth Rate of 10% for the company over the next 5 years. Next, I assume a Perpetual Growth Rate of 5%. I have used Visa’s current discount rate (WACC) of 8%.

My calculations are based on the following assumptions as presented below (in $ millions except per share items):

Company Ticker

V

Revenue Growth Rate for the next 5 years

10%

EBIT Growth Rate for the next 5 Years

10%

Tax Rate

23%

Discount Rate (WACC)

8%

Perpetual Growth Rate

5%

EV/EBITDA Multiple

22.4x

Transaction Date

16.05.2022

Fiscal Year End

30.09.2022

Current Price / Share

$199.23

Shares Outstanding

2,083

Debt

$21,027

Cash

$12,299

Capex

$827

Source: The Author

Based on the above assumptions, I calculated the following results (in $ millions except per share items):

DCF

Source: The Author

Apendix 1

Source: The Author

Apendix 2

Source: The Author

Terminal Value

Perpetual Growth

$765,175

EV/EBITDA

$600,836

Average

$683,006

Source: The Author

Market Value

Market Cap

$414,996

Plus: Debt

$21,027

Less: Cash

$12,299

= Enterprise Value

$423,724

Equity Value/Share

$199.23

Source: The Author

Intrinsic Value

Enterprise Value

$560,535

Plus: Cash

$12,299

Less: Debt

$21,027

= Equity Value

$551,807

Equity Value/Share

$264.91

Source: The Author

Market Value vs. Intrinsic Value

Market Value

$199.23

Upside

33%

Intrinsic Value

$264.91

Source: The Author

Relative Valuation Models

Visa’s P/E (FWD) Ratio

Visa’s P/E Ratio is currently 28.15. This is 14.63% below its average P/E Ratio from the last five years, which is 32.98. These figures provide us further evidence that the company is currently undervalued.

Visa’s Beta

The stock of Visa has a beta of 0.92, which is below that of the broader stock markets (with a beta of 1). This shows that an investment in Visa could not only contribute to the long-term growth of your investment portfolio, but also to the reduction of its volatility. In my opinion, these factors make Visa a very attractive buy-and-hold investment.

Visa in Comparison to Some of Its Competitors

In comparison to some of its competitors such as Mastercard, PayPal (PYPL), American Express, and Block (SQ), Visa has the highest EBIT-Margin (67.59%). Visa’s main competitor Mastercard has an EBIT-Margin of 55.56% while PayPal has an EBIT-Margin of 15.34%. The fact that Visa has the highest EBIT Margin in comparison to its competitors is another indicator of the company’s excellent market position within its business industry.

Furthermore, Visa has had the highest compounded annual dividend growth rate over the last 5 years (17.91%) compared to its competitors. During the last 13 years, Visa has managed to increase its dividend each year. This is further evidence of its robust business model. Given Visa’s strong position in its business segment, I believe the company will be able to continue growing its dividend with similar growth rates in the years to come.

Visa’s Dividend

As mentioned above, the compounded annual growth rate over the last five years of Visa’s dividend has been 17.91%. I have decided to make more conservative assumptions and therefore, I assume an average growth rate for Visa’s dividend of 12% per year in the future. If we were to assume that Visa was able to increase dividends by an average of 12% per year over the next 30 years and the investor would purchase Visa stocks at $199 per share, you would get the following result for company’s dividend (shown in the table below).

Year

Dividend per Share (in $)

Dividend Yield (FWD)

2022

1.50

0.75%

2023

1.68

0.84%

2024

1.88

0.94%

2025

2.11

1.06%

2026

2.36

1.18%

2027

2.64

1.33%

2028

2.96

1.49%

2029

3.32

1.66%

2030

3.71

1.86%

2031

4.16

2.09%

2032

4.66

2.34%

2033

5.22

2.62%

2034

5.84

2.93%

2035

6.55

3.29%

2036

7.33

3.68%

2037

8.21

4.12%

2038

9.20

4.62%

2039

10.30

5.17%

2040

11.53

5.79%

2041

12.92

6.48%

2042

14.47

7.26%

2043

16.21

8.13%

2044

18.15

9.11%

2045

20.33

10.20%

2046

22.77

11.43%

2047

25.50

12.80%

2048

28.56

14.34%

2049

31.99

16.06%

2050

35.83

17.98%

2051

40.12

20.14%

2052

44.94

22.56%

Although it’s true that this is a long investment horizon and new technologies can be developed and new competitors could enter into Visa’s business segment; I believe that Visa can stand out against its competitors and has the potential to raise its dividend by 12% per year due to its competitive advantages, growth prospects, it’s still growing profit margins as well as the company’s low payout ratio.

The calculation of the dividend yield for the next 30 years (while assuming a dividend growth of 12% per year) shows us that an investment in Visa could be very attractive when investing with a long investment horizon.

Risks Factors

One of the main risk factors I see for Visa are global recessions. In times when people consume less, Visa’s revenue will be affected negatively and this in turn effects the company’s profit margins. However, I assume that these effects will only have a temporary impact on Visa’s business and the risk is lower when investing with a long investment horizon.

Another risk factor is the fact that the global payment industry is extremely competitive. Visa operates in a market environment in which new technologies are developed rapidly and new competitors are emerging continuously. Visa competes with fintech companies, digital payment providers and technology companies, which have developed payment systems. A failure to anticipate new technologies in the payment industry, for example, could harm Visa’s business and could have negative effects for its future growth. However, over the past years, Visa has demonstrated its ability to successfully anticipate new technologies and has been able to use them to create new opportunities that have contributed to the company’s growth. I expect Visa to be able to do so in the future.

An additional risk factor for Visa could be that its payment system has the potential to be affected by cyber-attacks. This could have a significant impact on Visa’s revenue and the company’s profit. However, I assume that this kind of event would only have a temporary impact on the business. That’s why I rate such a risk as being rather low for long-term investors.

The Bottom Line

My Discounted Cash Flow Model indicates that Visa is currently undervalued with an upside of 33%. The DCF Model calculates a fair value of $264.91. The fact that Visa’s P/E (FWD) Ratio is currently 28.15, which is 14.63% below its average from the last five years (32.98), gives us yet another indicator that the company is currently undervalued.

In my opinion, the Visa stock is attractive for long-term investors who primarily focus on dividend growth. With a compounded annual dividend growth of 17.91% in the last 5 years and a dividend payout ratio of only 21.54%, which still offers scope for future dividend increases, Visa is an excellent fit for investors looking for a dividend growth stock. From my point of view, these factors make Visa an excellent investment for investors with a long-term horizon aiming to invest for their retirement.

The fact that Visa has the highest EBIT margin (67.59%) and the highest annual dividend growth rate of the last 5 years (17.91%) compared to its competitors Mastercard and American Express, provides further arguments for an investment in the company.

However, if you’re looking for a company from the financial services sector with a lower P/E Ratio, you might want to take a look at American Express. With a P/E (FWD) Ratio of 16.25, American Express is currently available at a lower price.

Personally, I am invested in Visa and see the company as a long-term investment. Visa has strong competitive advantages, which help the company to stand out against its competitors in the long-term: Visa’s reliable payments network, the company’s technological knowledge as well as its broad network within the financial service industry and strong brand image.

Thank you for reading and I would appreciate any feedback about this article!