Visa (V)

[Kerim]

I just spent a few minutes looking at Visa (V) after reading Tim McAleenan’s recent article arguing that it is “probably the best investment you can make today.” I am generally a fan of Tim’s work, and he seems a smart and thoughtful guy, so it strikes me as worth a closer look when he says something like that.

With a yield of 0.77 percent, this is not an income play by any stretch. They have been growing the dividend like gangbusters in recent years – more than 40 percent per year each of the last two years. Even so, because of very strong earnings growth, the payout ratio is still solidly under 20 percent. So they could continue to provide really great dividend growth in percentage terms going forward.

But by my math, they could increase the dividend by 20 percent each and every year for the coming decade, and you’d still only have a yield on cost of 3.96 percent in the year 2023. Hardly exciting for a dividend growth investor.

Tim’s focus with Visa is not as a dividend growth play, however. His premise seems to be that Visa is poised to have very strong earnings growth for years to come, and that the share price will naturally follow that right along. V is projected to earn around $9.00 per share in calendar 2014, and Tim states that:

Quote:Five years from now, there is a fair chance that Visa could be making $14-$15 per share in net profits. If you get the company and the growth rate, it doesn’t make sense to quibble over the valuation. You’d be looking back at today’s price in the low $200s wishing you would have chosen to strike when the fat pitch was crossing the plate.

By not “quibbling” over valuation, he means not worrying that V is trading at a P/E of about 24 (give or take a bit, depending on which earnings projections you use).

The article does not provide any support for the contention that Visa’s earnings growth is likely to continue along its current stellar path, but he also points to the fact that Visa “has no debt, no pension, no preferred stock, and low capital investments that lead to large growth.”

It sounds tempting to me, but I’ll have to do a lot more digging first before I stray too far from my DG wheelhouse into a trade like this. Anyone here own or follow V and have thoughts to share?

[Ok Red]

Depends on your timeline, Kerim. I looked at V long and hard when assembling my portfolio, but didn't pull the trigger. Why? First, I still don't trust financials - I don't believe the industry is really 'fixed' yet. Second, my timeline is 5-10 years, and starting at such a low yield doesn't really get me where I need to be even at the far end of the timeline. However, if you have 20 years or so, and you are comfortable with financial investments, it certainly appears to be a VERY strong investment.

[EricL]

I've looked hard at Visa a few times as well but held off because of the low yield and uncertainty about the future of credit cards. I think mobile payments will keep taking a larger share in future years. I think V can continue growing but between paying a high multiple and not getting much in the way of yield I've abstained from buying.

[TomK]

(06-02-2014, 08:55 AM)EricL Wrote: I've looked hard at Visa a few times as well but held off because of the low yield and uncertainty about the future of credit cards. I think mobile payments will keep taking a larger share in future years. I think V can continue growing but between paying a high multiple and not getting much in the way of yield I've abstained from buying.

Yes, this exactly. I have not studied V in depth, but the article is essentially urging you to think of V as a growth company. Maybe it will grow earnings in a big way in coming years, and that will help the share price if the multiple stays in the same (high) neighborhood as it is now. But given the headwinds Eric mentioned and the industry it is in, it hardly feels like a no-brainer, as the article implies. I'll just continue to wait for some of my dividend growth favorites to offer better entry opportunities, thanks.

[DividendDragon]

My timeline is around 30years and Im holding off. Why? I have little confidence in the future of credit cards. With the PayPal spinoff, apple pay, google checkout etc I see an increasingly crowded market. Worth a go at a fairer p/e but I feel there are more compelling investments out there at fairer prices.

(06-02-2014, 10:26 AM)TomK Wrote:

(06-02-2014, 08:55 AM)EricL Wrote: I've looked hard at Visa a few times as well but held off because of the low yield and uncertainty about the future of credit cards. I think mobile payments will keep taking a larger share in future years. I think V can continue growing but between paying a high multiple and not getting much in the way of yield I've abstained from buying.

Yes, this exactly. I have not studied V in depth, but the article is essentially urging you to think of V as a growth company. Maybe it will grow earnings in a big way in coming years, and that will help the share price if the multiple stays in the same (high) neighborhood as it is now. But given the headwinds Eric mentioned and the industry it is in, it hardly feels like a no-brainer, as the article implies. I'll just continue to wait for some of my dividend growth favorites to offer better entry opportunities, thanks.

[earthtodan]

I recently bought half a position in V. I had ignored them for a while thinking the same thing about mobile payments, Square, etc. that Lewys pointed out, but then I learned that Apple Pay actually uses Visa as its payment processor. Square Cash also uses V or MA as its payment processor, and Visa actually has an equity stake in Square. It turns out they have a pretty good lock on the mobile payments market, and that market has plenty of runway. As long as non-cash payments around the world increase, that should be good for Visa.

As a total return investor with a long timeframe, I've been training myself not to put too much emphasis on yield. In a few decades when I retire and have low earned income, if taxes on long term capital gains are still little to none in the lowest marginal tax bracket, I should be able to rotate into income investments without taking much of a hit. That should have the added benefit of lower capital gains taxes on my current investment income while I'm accumulating. Also, V buys back shares. Share buybacks aren't as consistent as dividends, but they are a tax-deferred form of shareholder return, which in this case adds a few percent to the total shareholder yield.

As for valuation, I've accepted that some stocks have a P/E higher or lower than I would think is reasonable, for reasons that I cannot quantify but are still valid, such as perceived stability or cyclicality (see the high valuation of low growth consumer staples). To some extent I just have to rely on relative or historical valuation to figure out what is fair. Visa deserves a high valuation for more than just EPS growth. They have no debt, and high margins. Organic revenue growth costs them practically nothing once the network is up. Revenue is naturally indexed to inflation because they take a percentage of merchant payments. Consumers do not apply pricing pressure because they are unaffected by the cut that Visa takes. Visa is essentially a midstream play on the flow of consumer cash, similar to the way KMI is a midstream play on the flow of oil and gas, with lenders upstream and merchants downstream. Merchants hate them, and outstanding lawsuits are a big risk, but that is a known uncertainty that I figure is priced in. The resolution of uncertainty tends to boost a stock's price even if a lawsuit is not settled in the company's favor.

Morningstar actually rates V as undervalued, and gives them a wide moat. The share price has been showing weakness all year so I figured it was time to buy. The only question left was, how to choose between V and MA? Visa HQ is in my neighborhood, and I sometimes drink coffee at the Starbucks across the street, so I decided to buy local. That's not much of an investment thesis but it did make it easier.

I admit, the recently announced 20% dividend increase is lower than I was hoping for based on the historical rate of growth. Dividend growth is important. Given that increase, I'll stick with half a position until more information becomes available that affects my conviction on the stock.

[rapidacid]

Good points on multiple fronts Dan.