At the end of 2012, Visa (V) stock sold at $37.90/share. The stock had a forward annual dividend of $0.33/share. The company generated $1.74/share in Free Cash Flow.
The stock had a low yield of 0.87%, and a high Price to FCF of 21.78.
At the end of 2012, Verizon (VZ) stock sold at $43.27/share. The stock had a forward annual dividend of $2.06/share. The company generated $3.85/share in Free Cash Flow.
The stock had a high yield of 4.76% and a low Price to FCF of 11.24.
Some investors may have shunned Visa in 2012, because of the high valuation and low current yield. They could have picked Verizon instead, because of its higher dividend and lower valuation.
In 2022, Verizon generated $2.48 in FCF/share. The trailing 12-month FCF is at $3.25/share. The stock has a forward annual dividend of $2.66/share. Verizon yields 6.92% today. It sells for 11.85 times trailing FCF.
The investor who bought Verizon in 2012 is sitting at an yield on cost of 6.14%.
In 2022, Visa generated $8.58 in FCF/share. The trailing 12-month FCF is at $10.52/share. The stock has a forward annual dividend of $2.08/share. Visa yields 0.82% today. It sells for 24 times trailing FCF.
The investor who bought Visa in 2012 is sitting at an yield on cost of 5.48%.
Visa had a high rate of growth over the next decade, while Verizon didn’t. This is why investors in Visa are generating an yield on cost that is getting closer to that of Verizon, despite the low initial yield.
Growth is never guaranteed of course. If Visa had not delivered much growth for one reason or another, it could’ve actually lost money for investors, as valuations shrunk.
The lesson is that it is important to take into account growth expectations, when determining the value of a company. In other words, value and growth are connected at the core. Meaning, you need to look at the multiple, in conjunction with past and expected rate of growth, stability/durability of the business.
I also wanted to reiterate the sources of investor returns, which put everything in perspective.
Investor returns are a function of:
1. Dividends
2. FCF/Share Growth
3. Change in valuations
The first two items drive the fundamental return for investors. The last item is the speculative return.
It is important to understand where investor returns come from.
Relevant Articles:
- Value and Growth Are Attached at the Hip