Are you risk-adverse and looking to invest in well managed companies with a long history of growth and innovation? Do you like the added bonus of receiving regular dividend payments?
In this series, I present resent stocks with solid balance sheets, exceptional management and exciting growth prospects you should seriously consider buying and holding on to for the next decade and beyond.
Today, we cover VISA INC (NYSE: V).
VISA INC (NYSE: V)
Visa Inc is is an American multinational financial services corporation which facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit cards, debit cards and prepaid cards.
Visa’s effectively holds a 60% share of the credit card and debit card markets. Mastercard, its nearest competitor, holds 30% of the markets and American Express, the third leading company in this sector, holds an 8.5% share.
In 2019, it is estimated that Visa:
- Is present in more than 200 countries,
- Has an estimated 50 million merchants accepting Visas,
- Processed $9 trillion in transactions,
- Has more than 16,000 financial institutional partners,
- Counts 3.4 billion cards in circulation.
Visa’s moat is principally constituted by network effects and economies of scale: Since millions of people use Visa, the payment network becomes very attractive for merchants, which in turn makes the network more convenient for customers. This allows to company to scale its operations, which lowers costs and significantly boosts margins.
However, although they completely dominate the credit card market, Visa’s management is aware that the financial landscape is quickly evolving.
As a result, the company is actively trying to widen its economic moat in order to fend off potential competitors. For example, in January of this year, Visa announced the $5 billion acquisition of Plaid, a “a network that makes it easy for people to securely connect their financial accounts to the apps they use to manage their financial lives“. The acquisition of a “a leader in the fast growing fintech world with best-in-class capabilities and talent“, declared Al Kelly, the CEO and Chairman of Visa, “will position Visa to deliver even more value for developers, financial institutions and consumers“.
Analyzing the company’s financials will reveal that the company is in a very healthy financial situation and well positioned to sustain its dominant market position and continue growing.
1 – REVENUES & PROFITABILITY
Visa is one the rare companies whose Income Statement is immaculate:
- 2016-2019: Revenues increased by 52%,
- 2016-2019: Gross Profit increased by 52.7%,
- 2016-2019: Net Income increased by 101.6%,
- 2016-2019: EBITDA increased by 79.5%.
The net income and EBITDA figures indicate that Visa’s profitability is increasing at twice the pace of its revenues. The management is obviously very competent at controlling costs and maximizing profits.
Further, as the chart below attests, Visa’s profitability is exceptional:
- 2016-2019 average annual Gross Margin is 81.7% which is very high. (Note: On the chart below, macrotrends states that Visa’s gross profit is equal to revenues, which incorrect. I don’t understand how they calculated this metric but it’s definitely wrong. Perhaps a data entry error..),
- 2015-2019 average annual Net Profit Margin is 44.8% which is very high.
Lastly, Visa’s average annual returns are also high:
- 2015-2019 average annual ROE is 29%, which is high. We also notice that ROE has increased significantly since 2017, jumping from 24% in 2017 to 36% in 2018 and 41% in 2019.
- 2015-2019 average annual ROA is 21% which is high.
- 2015-2019 average annual ROI is 18% which is high.
CONCLUSION: Visa’s profitability is increasing, their margins are high and their returns on assets, equity and investments are good.
2 – ASSETS, DEBTS & CASH FLOW
- 2016-2019: Total Cash has increased 35%.
- 2016-2019: Total Current Assets increased 46.5%.
- 2016-2019: Total Assets increased 13.3%.
- 2019 Long Term Debt is $16.7 billion. It increased just 5.3% over the last 4 years, which indicates that the company is keeping the debt levels under control.
- Current Ratio of 1.56 is good: Visa’s short-term assets cover short-term liabilities.
- Debt to Equity Ratio of 1.09 is poor: Stockholder equity is insufficient to cover total liabilities. However,
- Debt Ratio is 0.5 which is good: The company is not relying on debt to grow.
Visa’s management is doing a great job of keeping liabilities under control. Its long term debts of $16.7 billion is low given the company’s revenues and profits. Indeed, its 2019 EBITDA covers the entire long term debt.
Given its massive profit margins, Visa is capable of generating considerable cash flow: its 2019 Free Cash Flow of $12.5 billion represents a whopping 53.4% of revenues. Even more impressive is the continued increase in Free Cash Flow: In 2019, Visa’s Free Cash Flow is up an incredible 148.9% from 2016 when it stood at ‘just’ $5 billion.
CONCLUSION: These figures show that the company is ruthlessly effective at increasing its profits and generating cash flow. Having this much cash on hand means that the company can invest in growth through R&D and acquisitions. Their purchase of Plaid for $5 billion had no impact on their share buyback policy and scheduled dividend payments. Impressive.
3 – THE DIVIDEND
Visa pays an annual dividend of $1.20 per share, which represents a very modest dividend yield of 0.74%. Visa’s IPO is still relatively recent, (late 2000s) so the company low payout ratio of 21.87% is understandable. Given the company’s stellar performance, we can reasonably expect a progressive increase of the payout ratio in the coming years..
The current dividend yield of 0.74% is superior to the 4-year yield average of 0.63%. This is a very low yield that will hopefully increase as the company keeps increasing the dividend over the coming years.
Indeed, our expectation of a continually increasing dividend is confirmed by the 10 year growth rate of 25%. This is an impressive growth rate that proves the company’s willingness to reward its shareholders.
CONCLUSION: Visa’s dividend is low because the company’s IPO is actually quite recent and the company is taking it slow. However, the dividend growth rate suggests that management will pursue its strategy of gradually increasing the dividend every year. Expect Visa to become a Dividend Aristocrat stock in due time.
4 – CONCLUSION
Undeniably, Visa is a very well managed company:
- The board is proactive, in tune with new digital age and focused on expanding the firm’s already wide economic moat,
- The gradual move towards a cashless economy means the company is very well position to sustain its growth,
- Revenues, net income and EBITDA are increasing every year,
- Gross and Net Profit Margins are exceptional and well sustained,
- The debt burden is low and very well managed,
- The company generates significant cash flow,
- ROI, ROE and ROA are good,
- The dividend yield is low but dividend growth is strong,
- The company’s strong growth potential suggests there is a high probability of making sizeable capital gains.
RECOMMENDATION: STRONG BUY.
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Disclaimer: This is not financial advice. Do your own research before investing in any asset.