Note from Daily Trade Alert: The company mentioned in today’s article is Visa (V). Today, Visa’s stock split 4:1. Please take this into consideration when reading Jason’s fair value analysis.
There are a few global trends that can not only be easily seen by just about everyone, but can also be somewhat easily capitalized on.
One of the biggest trends out there is the move away from cash payments and toward digital payments.
This is due to the fact that digital payments can be easier, more accessible, safer, quicker, and give almost instantaneous access to credit.
And with the trend toward digital payments comes profits for those that can see it and invest accordingly.[ad#Google Adsense 336×280-IA]One of the biggest opportunities available in this space is Visa Inc. (V).
Visa is a payments technology company that operates on a global scale.
They connect consumers, banks, governments, and businesses in more than 200 countries to a fast and secure electronic payments system.
It won’t surprise you that Visa is a large company – it’s a household name at this point.
The market cap is north of $165 billion.
However, what is surprising is that Visa is still growing at such a rapid pace.
Visa went public in 2008, so financial information dating back a decade isn’t available. But we can see what kind of growth the company has managed over the last five years, which gives us a very recent picture as to what they’re capable of.
Revenue was $8.065 billion in fiscal year 2010. That grew to $12.702 billion in FY 2014. That means the top line grew at a compound annual rate of 12.03%.
Earnings per share increased from $4.01 to $8.62 over this five-year stretch, which is a CAGR of 21.09%. Not only is that amazing in absolute terms, but it’s coming off of a relatively large base. It’s just not all that often that you see a large, established company growing EPS at over 20% per year.
S&P Capital IQ anticipates that EPS will grow at a 12% compound annual rate over the next three years. Still impressive, but subdued.
Now, Visa has only been publicly traded since 2008, as aforementioned, so they don’t have the kind of lengthy dividend growth streak that a lot of other blue-chip stocks do.
But they have been annually increasing their dividend for as long as they’ve been able to – seven consecutive years.
That streak qualifies them to be on David Fish’s Dividend Champions, Contenders, and Challengers list, which is a list that contains information on every US-listed stock that has increased its respective dividend for at least the last five consecutive years.
Moreover, what Visa might lack in a lengthy streak they more than make up for in dividend growth.
The five-year dividend growth rate stands at an incredible 30.7%.
Factor in a low payout ratio of just 21.4% and one can see how it’s highly likely that substantial dividend growth will continue, especially with the core business growing so much.
The only drawback is perhaps the yield – 0.72%. That doesn’t offer much in the way of current income.
I personally love investing in companies with low debt, but Visa takes the cake with no long-term debt. This was a factor in my consideration to personally invest in this company – I’m long V in my six-figure portfolio.
And Visa’s profitability is off the charts. The company has posted net margin that’s averaged 36.43% over the last five years and return on equity of 14.52%.
These numbers are really incredible. Visa is growing at a such a robust rate it’s almost unbelievable. And since the need for capital is so low and there’s no debt on the balance sheet, Visa is an excellent position to return a lot of cash flow to shareholders over the coming years.
That cash flow should continue to grow impressively since Visa absolutely dominates the electronic payments space, accounting for approximately half of the world’s credit card transactions and 75% of debit card transactions.
Meanwhile, the growth runway for a larger market is long because of the fact that the vast majority of the world’s transactions are still completed in cash. So you’ve got a huge market share of an already incredible profitable market, and that market just happens to have a ton of growth potential. This explains Visa’s recent results to some degree.
And what’s even perhaps more amazing is that Visa basically has inflation protection built right in. The company captures a piece of all global commerce via a fee on transactions.
So as products and/or services go up in price over time, Visa’s fees will naturally grow as well. That means it’s likely that revenue, earnings, and dividends will grow over time before even factoring in the growing market for digital payments.
There are some risks to consider, however, like regulation, which can impact the business in a material way. In addition, there could be a long-term risk in payment technologies changing over time, especially in the mobile payments arena.
The valuation might appear rich on shares right now with a P/E ratio of 29.52, but that’s in line with the five-year average. And it seems reasonable considering the growth trajectory.
I valued shares using a two-stage dividend discount model analysis with a 10% discount rate and a 20% growth rate for the first 10 years. The terminal rate I used is 8%. These rates seem reasonable when looking at Visa’s low payout ratio, robust underlying growth, and potential in the market. The DDM analysis gives me a fair value of $279.46.
Bottom line: Visa Inc. (V) is an incredibly high-quality company. They offer a ubiquitous service that will only likely increase in demand over the coming years. The fundamentals across the board are excellent and the company continues to grow at a rapid rate. Though the yield’s a bit low for any income seekers out there, this stock could offer excellent total return prospects when looking out over the next decade. Visa might be one of the best possible dividend growth stocks out there. I’d strongly consider shares here.
— Jason Fieber[ad#sa-income]