Visa is a dividend achiever, which has managed to increase its quarterly dividends for 11 consecutive years.
Between 2009 and 2019, the annual dividend increased from 10 cents/share to $1/share. The last dividend increase occurred in October 2019, when the Board of Directors hiked quarterly dividends by 20% to 30 cents/share.
The company is in the initial phase of dividend growth, where dividends increase faster than earnings due to low initial payout ratio. Future growth in dividends will likely exceed the rate of increase in earnings per share over the next decade, after which dividend growth would likely closely follow growth in earnings per share.
The growth in dividends was fueled by rapid growth in earnings per share over the past decade. Visa managed to grow earnings from 78 cents/share in 2009 to $5.32/share in 2019.
The company is expected to earn $5.03/share in 2020 and $5.87/share in 2021. The Covid-19 recession decreased earnings expectations. A little over the past 90 days the expectations were for $6.10/share in earnings for 2020 and $7.16/share in 2021.
With Visa I liked the fact that the company is part of a global duopoly with Mastercard (MA) in the global credit card market. In the future, the proportion of cashless payments is going to increase. While the market for credit cards is developed in the US, in emerging markets there is the opportunity for hundreds of million people who will sign up for the first card in their lives over the next decade.
Visa has a wide moat due to its strong brand, scale of operations, and legal barriers to entry, as well as the Network Effect. When more retailers accept a given card, other merchants will be more willing to accept Visa as a payment method, in order to compete successfully for customers. When more retailers accept Visa, more customers are willing to use Visa as a payment method due to its convenience factor. When more customers are willing to use Visa, more retailers are willing to accept Visa as a payment method, in order to gain those customers. As a result, any additional new customer or a new retailer that is added to the network increases its depth and appeal, thus making it more valuable and needed. With the Network Effect, a service is more valuable when more participants use it.
When you have a payment network, you also achieve scale, as you have a large number of participants (both retailers and customers). Therefore, it is extremely difficult to set up a competing network for payments. In addition, there are high barriers to entry due to complicated legal and regulatory frameworks in different countries. Once you achieve a certain scale, the type that Visa and MasterCard possess, each additional transaction in the network is much more profitable.
The market for cashless transactions is destined to only increase in the future. Most transactions in the developing world are still done with cash currency, which causes a cost to merchants. Accepting, storing, and transporting cash is expensive because of the risk of theft, counterfeit currencies, and making errors in calculations. I expect the volume of cashless transactions using debit and credit cards to only increase in the coming two decades. I like the strong brand of Visa, which is essentially a duopoly with MasterCard, although American Express has somewhat of an entrenched position with business customers. In addition, as more shopping is done online, the need for debit and credit cards increases as well. Retailers like plastic, because consumers end up spending more when they pay on credit and do not have to dole out physical cash right away.
In addition, I expect the amount of transactions to increase over time as well. Therefore, the company will benefit from growth of overall transaction volume and the increase in share of cashless transactions globally.
The risk to companies like Visa is a paradigm shift in technology, which could help consumers to use an alternative payment method for cashless transactions. However, those paradigm shifts will be difficult for competitors because of the regulatory barriers and the fact that the competing network would still need to get more customers to use it and more retailers to accept it. Building out a competing network from scratch could be costly and time-consuming. It would be much easier for such a paradigm-shifting technology to partner with the likes of Visa, rather than compete directly head-on with it.
The company has returned money to shareholders through dividends and share buybacks since its IPO. Between 2009 and 2019, the number of shares outstanding has decreased from 3.036 billion to 2.272 billion. The consistent decrease in shares outstanding adds an extra growth kick to earnings per share over time.
The dividend payout ratio has increased from 13% in 2009 to 19% in 2019. There is room to increase dividends at a rate higher than earnings by expanding the payout ratio. A lower payout is always a plus, since it leaves room for consistent dividend growth, minimizing the impact of short-term fluctuations in earnings.
The stock is overvalued at 38 times forward earnings and yields only 0.60%. This is a company that will offer a high potential for future dividend growth, and a high yield on cost in the future. I would be surprised if Visa does not pay at least $5/share in annual dividends in 2030. Chances are its earnings would be triple what they are today by 2030. Of course, this is a company worth $400 billion too, so the mere size will be an impediment to future growth rates.
2019
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2018
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2017
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2016
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2015
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2014
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2013
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2012
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2011
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2010
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P/E High
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35.16
|
34.08
|
38.15
|
33.79
|
29.81
|
27.26
|
26.43
|
42.70
|
17.42
|
22.71
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P/E Low
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22.86
|
23.73
|
26.85
|
26.66
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18.91
|
20.85
|
17.75
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25.54
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12.23
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15.17
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