10-26-2014, 04:23 PM
(This post was last modified: 10-26-2014, 04:28 PM by 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.
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.