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Warren Buffett Stocks in Focus: Visa

Published by Bob Ciura on May 28th, 2017

Visa (V) is one of the most successful IPOs in modern history. Since Visa went public at a split-adjusted price of $11 per share in 2008, it has risen by more than eight-fold.

With that in mind, it is not surprising to see that Warren Buffett owns 10.56 million shares of Visa, equal a current market value of $938.6 million. This represents 0.56% ownership in the company.

Click here to see the complete list of Buffett’s top 20 stocks.

Buffett has a stated fondness for companies with wide economic “moats”, which refers to its competitive advantages. He also looks for companies with strong management teams.

Visa embodies all of these qualities, which makes it is easy to see why the stock earns a place in the Oracle of Omaha’s investment portfolio.

Visa has increased its dividend eight times since its IPO. In two years, it will become a Dividend Achiever, a group of 264 stocks with 10+ years of consecutive dividend increases.

Click here to see the entire list of Dividend Achievers.

Buffett owns nearly $1 billion of Visa, and this article will discuss why dividend growth investors might want to consider the stock as well.

Business Overview

Visa is a unique stock in the financial sector. It does not make loans, like a bank. Instead, Visa is a global payment network.

In a way, Visa is part financial stock and part technology stock.

Global payments are a huge network. Visa–branded cards and payment products facilitate approximately $6.8 trillion in global payments volume each year.

Visa derives revenue from four operating segments:

V Revenue

Source: Q2 FY17 Earnings Presentation, page 7

The fundamental backdrop for Visa is very strong. Visa operates essentially in a duopolistic market, along with MasterCard (MA).

2016 was a very strong year for Visa. Revenue and adjusted earnings-per-share increased 9% and 8%, respectively, from 2015.

2017 is likely to be another excellent year—the company expects revenue growth of 16%-18%. Adjusted earnings-per-share are expected to rise in the mid-teens on a percentage basis.

The acceleration of revenue and earnings growth will be the result of several significant growth catalysts.

Growth Prospects

Visa is a growth company. It performed well last year, and is off to an even better start to fiscal 2017.

For example, net revenue increased 23% last quarter. The company benefited from higher cards outstanding, including 20% growth in credit cards and 31% growth in debit cards.

In addition, revenue growth was boosted by growth of the U.S. payments industry.

V Payments

Source: Q2 FY17 Earnings Presentation, page 4

Going forward, one of Visa’s top growth prospects stems from the 2016 acquisition of Visa Europe for approximately $23 billion.

The deal brought together two industry giants, which combined have a client base of more than 17,000 financial institutions, 40 million merchant outlets, and 3.0 billion Visa cards around the world.

This presents a huge growth opportunity. Consider that international transaction revenues increased 41% last quarter.

In addition, Visa will benefit from the shift from cash to cards.

We are increasingly living in a cashless society. Many consumers are carrying less cash on them, opting for debit and credit cards. There is good reason for this, as carrying physical currency exposes consumers to the risk of loss or theft.

As a result, this sets up a long-term tailwind for Visa.

A big part of this is the push to mobile. Digital banking and transaction volume is rising. However, this also sets up a new set of potential security concerns.

This is why Visa acquired CardinalCommerce in December 2016—to enhance the security and anti-fraud solutions for transactions made by mobile apps and connected devices.

Another potential growth catalyst would be expansion in China, which Visa has pursued for many years. Unfortunately, not much progress has been made yet.

On the company’s earnings call last quarter, Chief Executive Officer Al Kelly said the following regarding an update on China:

“Hopefully the Chinese government by the end of the second quarter is going to publish a set of more clarifying rules about international entities and what would be required to submit for a license.”

So, while China remains a compelling catalyst, Visa investors will have to continue to wait and see. But, if and when China loosens its regulatory restrictions, Visa stock would likely react very positively to the news.

Dividend Analysis

Visa is an excellent growth stock, but its low dividend yield leaves a lot to be desired for income investors.

Visa has a current dividend yield of just 0.70%, which is less than half the average dividend yield in the S&P 500 Index.

This could make it less attractive for investors interested in higher yields. That said, Visa is a very attractive stock for dividend growth investors.

Over the past five years, Visa has increased its dividend by 25% each year, on average.

There should be plenty of growth potential up ahead for Visa’s dividends. As its revenue and earnings continue to grow, its dividend will continue to grow at high rates as well.

And, Visa has a low dividend payout ratio of 23% based on 2016 adjusted earnings-per-share. Distributing less than one-quarter of annual earnings is a very low payout ratio.

As a result, Visa can reasonably be expected to raise its dividend by at least 20% per year over the next several years.

This kind of dividend growth can compensate investors for a low yield.

Even with a beginning yield of just 0.70%, Visa stock could generate a yield on cost of 6.5% in 10 years, assuming 25% dividend growth each year.

Visa can raise its dividend at such high rates because it generates huge amounts of cash. The company ended last quarter with $10.7 billion of cash and equivalents on the balance sheet.

This allows it to reward shareholders with dividends and share buybacks. Visa added $5 billion to its share repurchase authorization after reporting second quarter earnings.

Final Thoughts

The global payments market is absolutely massive, and Visa sits on top of the industry. One risk investors should monitor moving forward is the rise of new payment processing companies.

Intensifying competition could not only come from startups, but also from tech giants like Alphabet (GOOGL), Alibaba (BABA), or Amazon.com (AMZN).

However, this is where an economic moat is useful—it would be extremely costly to build a network large enough to compete on the same level as Visa.

As a result, investors can continue to expect Visa to generate high earnings and dividend growth going forward.

Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.

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