Visa: Buy This Free Cash Flow Machine And Thank Me Later

In dividend investing, my opinion is that free money circulate is usually the last word measure of whether or not or not an organization is price proudly owning (utilities and REITs are notable exceptions). Earnings are an incredible beginning place, however free money circulate typically gives a extra telling narrative on how a enterprise is doing.

I like to think about company earnings like a pay stub. Certain, that may inform me how a lot I am taking residence. However taking a look at my checking account could be extra helpful as a result of I can get a transparent understanding of how a lot cash is coming in and going out, and what’s left over.

Unsurprisingly, c-corps which are producing a great deal of free money circulate are going to be extra giving with dividend progress as a result of they will afford it. One such firm that’s the cornerstone of my dividend progress portfolio is Visa (NYSE:V).

For the primary time since September, let’s reexamine the corporate. I will spotlight the corporate’s current working outcomes and its valuation to elucidate why I’m sustaining a purchase ranking.

Visa’s 0.9% dividend yield clearly distinguishes it as extra of a progress firm than a pure-play dividend firm. However for individuals who are affected person and do not thoughts holding over the lengthy haul, Visa could possibly be an incredible decide. It is because the EPS payout ratio of 21% is only a fraction of the 60% payout ratio that’s thought of to be secure by ranking companies for Visa’s trade.

Except for its very low payout ratio, the corporate additionally has an incredible steadiness sheet. Visa’s 35% debt-to-capital ratio is available in beneath the 40% that ranking companies want from its trade. For these causes, S&P has awarded an higher investment-grade credit standing of AA- on a steady outlook to the corporate. That suggests the danger of Visa closing its doorways by 2053 is simply 0.55%.

As if these spectacular fundamentals weren’t sufficient, the inventory additionally appears to be low-cost. If historic truthful worth metrics like dividend yield and P/E ratio are any indication, shares of Visa are price $316 per Dividend Kings.

My truthful worth estimate utilizing the discounted money flows mannequin is $285 a share. For context, I used $8.77 in trailing 12-months adjusted diluted EPS, a ten% low cost fee, and assumed a 5-year annual adjusted diluted EPS progress fee of 8%, and 6.5% thereafter.

Averaging my truthful worth estimate and Dividend Kings’ truthful worth collectively, I get a $301 truthful worth. If Visa grows as anticipated and returns to this truthful worth, here’s what whole returns might resemble for the subsequent 10 years from the present $242 share value (as of November 10, 2023):

• 0.9% yield + 14.9% annual earnings progress + 2.2% annual valuation a number of upside = 18% annual whole return potential or a cumulative whole return of 423% versus the ten% annual whole return profile of the S&P 500 (SP500) or a cumulative whole return of 160%

A Robust End To Fiscal Yr 2023

World-class companies are likely to constantly develop and outpace analysts’ expectations. To maybe no one’s shock that has been following Visa for some time, the corporate exceeded expectations in its fourth quarter to shut out its fiscal 12 months 2023.

Visa’s web income in the course of the fiscal fourth quarter grew by 10.6% over the year-ago interval to $8.6 billion. This narrowly beat the analyst web income consensus by $50 million.

Stable outcomes throughout the board are what led to this outperformance. As was the case for the fiscal 12 months general, the corporate’s funds quantity (e.g., the whole greenback quantity of transactions processed on Visa’s community) elevated by 9% for the quarter. This was aided by regular shopper spending and revenge travel spurred by when the COVID-19 pandemic compelled customers to defer journey preparations.

Talking of the latter, a 16% uptick in cross-border quantity within the fourth quarter (conditions the place the issuing nation of a card is not the identical because the service provider nation) helps this assertion.

Lastly, Visa’s processed transactions elevated by 10% in the course of the fourth quarter. Except for the variables we already mentioned, the continued progress of the corporate’s card base contributed to those outcomes.

Visa’s non-GAAP EPS surged increased by 20.7% year-over-year to $2.33. Increased web income and a 340 foundation level enchancment in non-GAAP web margin to 55.9% had been the first contributors to this vigorous earnings progress.

Trying forward, Visa’s working fundamentals ought to proceed to be promising as extra retailers settle for the corporate’s fee strategies to attract its huge buyer base. It will preserve propelling web income and earnings progress, which is why FactSet Analysis expects 14.9% annual earnings progress from Visa shifting ahead.

Transferring to the steadiness sheet, the corporate additionally shines on this division. In subtracting Visa’s $20.1 billion in money and money equivalents and funding securities as of September 30 from its $20.5 billion in long-term debt, its web debt is simply $335 million. In opposition to the $22 billion in EBITDA that the corporate generated in fiscal 12 months 2023, this web debt load is virtually zero (all particulars sourced from Visa Q4 2023 earnings press release).

The Most secure Dividend Is The One Simply Hiked By 16%

Visa’s 15.6% increase in its quarterly dividend per share to $0.52 and new $25 billion share repurchase program emphasize simply how a lot the corporate cares about shareholders.

In much more excellent news, the corporate can simply afford to offer its shareholders with these goodies. Visa’s 10-Ok submitting for fiscal 12 months 2023 will not be out for at the very least a couple of extra days. However within the first 9 months of the fiscal 12 months, the corporate generated $13.1 billion in free money circulate. Placing this into perspective, which means Visa transformed 54.4% of its web income into free money circulate. This free money circulate margin is unmatched by any enterprise of which I’m conscious, which speaks to the moat that it possesses.

Even with $2.8 billion of dividends paid within the first 9 months of the fiscal 12 months 2023 and $8.4 billion in share repurchases, the corporate nonetheless had extra money (information on this part sourced from pages 11 and 5 of 171 of Visa 10-Q filing). That is why there’ll virtually actually be loads extra mid- to high-teens dividend hikes left in Visa’s future.

Dangers To Think about

Whilst a 13/13 extremely SWAN per Dividend Kings, Visa has its dangers as all companies do.

As I indicated in my earlier article, the most important danger might be regulatory. Visa’s revenue margins are out of this world, which might finally make the corporate a sufferer of its success. Within the U.S., the Credit Card Competition Act of 2023 was put again onto the desk this summer season. Though it appears to have stalled out as of now, the invoice might theoretically result in extra competitors for the likes of Visa. This might weigh on the corporate’s revenue margins if it had been ever handed.

One other danger to Visa is that with the delicate data of billions of cardholders, it’s a frequent goal of cyber breaches. If the corporate ever skilled a serious cyber breach, belief within the model could possibly be diminished and its fundamentals could possibly be harmed.

Abstract: A Buffett Inventory With Excessive Whole Return Potential

Visa’s immense profitability, wholesome progress prospects, and ironclad steadiness sheet clarify why Berkshire Hathaway (BRK.A)(BRK.B) owns a $2 billion stake.

FAST Graphs, we are able to see that the corporate’s valuation is cheap. Visa’s 27.4 blended P/E is in keeping with its regular P/E ratio of 27. Thus, the corporate is anticipated to generate 13% annual whole returns over the subsequent two years for shareholders if the valuation returns to its regular P/E ratio.

Searching over the long run, Visa can supply almost triple the returns of the S&P. Subsequently, I am affirming my purchase ranking on the inventory.