Why Visa Inc Is a Better Stock Than Dividend Investors Think
Never lose interest in a stock simply because of a low dividend yield. For instance, it would’ve been pretty easy for income investors to pass on Visa Inc (NYSE:V) stock and its regularly paltry sub-one-percent dividend yield in recent years. But with V stock having returned roughly 220% over the past five years, those same investors would’ve also missed out on some amazingly awesome capital gains.
Now, I don’t know if V stock will be able to deliver that kind of price appreciation going forward, but the company’s quarterly results last week certainly offer encouraging signs.
Let’s take a closer look.
For Q1, Visa’s earnings per share clocked in at a solid 0.86, easily topping the consensus by $0.08. Meanwhile, revenue soared 25% to $4.46 billion, besting estimates by $170.0 million, as results from the recently acquired Visa Europe were included for a second full quarter.
Fueling the better-than-expected quarter was a 39% increase in payments volume to $1.8 trillion, as well as a 44% jump in total transactions to 27.3 billion. Moreover, cross-border volume spiked 140% year-over-year, easing some concerns on Wall Street that Visa is losing a bit of ground in international transactions.
To be sure, Visa continues to face some pricing pressure as a result of increasing merchant bargaining power, but it’s not enough to be a real concern at this point. Q1 client incentives increased to $1.0 billion from $788.0 million a year-ago.
So all in all, Visa’s Q1 results tell a very clear story: despite a bit of pricing drag, the long-term trend away from cash continues to fuel massive payments volume and transaction growth for the company.
And looking ahead, management expects a revenue increase of 16% to 18% with operating margins in the mid-60s, suggesting that the trend won’t be slowing anytime soon.
“As we look ahead, we continue to see good momentum in the business driven by domestic and cross-border volumes, increasing consumer participation in electronic payments in developing markets, and the further acceleration of e-commerce in developed markets,” said Alfred Kelly, Jr., chief executive officer. “We remain focused on the integration of Europe which is proceeding well.” (Source: “Visa Inc. Reports Strong Fiscal First Quarter 2017 Results,” Visa Inc, February 9, 2017.)
Of course, as income-oriented investors, our main concern is whether or not Visa’s management team is committed to sharing the wealth with shareholders. After all, with a dividend yield of just 0.7%, Visa might not exactly strike you as a champion of capital return.
Well, you might be surprised to know that Visa has returned nearly all of its operating cash flow over the past three years to shareholders. Management has simply chosen to emphasize stock buybacks over dividends in doing so. In 2016, for example, Visa spent about $7.0 billion on share repurchases, compared to just $1.4 billion on dividends.
Now, to be sure, Visa might do well to increase its current payout ratio (only 23%) and focus on prolonged double-digit dividend growth. The shift in emphasis alone would make V stock far more attractive to far more investors.
However, what’s really important is that Visa’s dominant competitive position, robust cash flows, and long-term trends allow management to be flexible with its capital return strategy.
The Bottom Line on V Stock
V stock deserves a place on any income investor’s watch list.
As the biggest payment processor in the world, accounting for about half of all credit card transactions, Visa stands to benefit greatly from the long-term secular trend toward a cashless world. And while investors would probably like to see a higher dividend, it’s tough to question the management’s capital return decisions, given V stock’s long-term outperformance.
Sure, there will probably be a day when payment volumes stagnate and a higher dividend payout will be more appropriate. But I’ll trust management to know when that day comes. Until that point, Visa’s 0.8% dividend yield and heavy growth tailwinds might just provide income investors with a surprisingly satisfying total return.