Visa: War on cash goes on

Visa is one of the larger positions in my portfolio and I bought more shares during the last two weeks because the company’s valuation is close to a four year low.

Visa is the world’s largest payment network and is present in more than 200 countries. Visa should compound at 10% every year because of a secular shift towards online retail and electronic payments. The COVID-19 virus outbreak should also accelerate these trends. Why go to a crowded store and use germ-infested cash when you can buy things online or pay with a credit card?

USDm Revenue Net profit Operating cash flow Free cash flow Shares (diluted) DPS
2008 6,263 804 531 1707 2,956 0.03
2009 6,911 2,353 558 2,769 2,956 0.11
2010 8,065 2,966 2,691 2,450 2,956 0.13
2011 9,188 3,650 3,872 3,519 2,828 0.15
2012 10,421 2,144 5,009 4,633 2,712 0.22
2013 11,778 4,980 3,022 2,551 2,624 0.33
2014 12,702 5,438 7,205 6,652 2,523 0.40
2015 13,880 6,328 6,584 6,170 2,457 0.48
2016 15,082 5,991 5,574 5,051 2,414 0.56
2017 18,358 6,699 9,208 8,501 2,395 0.66
2018 20,609 10,301 12,713 11,995 2,329 0.82
2019 22,977 12,080 12,784 12,028 2,272 1.00
LTM 23,525 12,375 13,365 12,575 2,259 1.05

Visa was listed in 2008 and has enjoyed steady growth in revenue and cash flow. Revenue, net profit and dividend per share compounded at 12%, 17% and 25% from 2010-19 so Visa is clearly enjoying operating leverage. The company’s dividend payout is only 20% of earnings so the dividend looks well protected. Costs are mostly fixed costs so increased transactions and revenue will lead to growing profit margins and free cash flow.

Visa collects a small fee from connecting merchants, customers and banks with the company processing 160 currencies among more than 200 countries.

As the world’s largest payment network, Visa benefits from network effects and recurring income. Visa’s growing payment network among merchants should attract more consumers which will in turn attract more merchants to use the company’s network.

Visa processed USD8.8 trillion of payments in fiscal 2019 while the addressable market is USD185 trillion based on its 2020 Analyst Day presentation so there should be plenty of growth opportunities.

Valuation and risks.

Based on its USD147 share price, Visa is trading at 26.6x trailing earnings and a 0.8% dividend yield which seems cheap compared to its 30x average PE over the last 10 years. Visa will be hurt in the short term because of fewer cross-border transactions but should be deliver good growth over the long term.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s