Visa (V) operates the world's largest retail electronic payment system. This includes consumer credit, debit, prepaid, and commercial payments, states Shawn Allen, contributing editor to Internet Wealth Builder.
Visa itself does not issue credit cards — they are issued under license, mostly by banks. Visa processes most of the transactions and collects service fees and data processing fees, effectively amounting to "toll charges" on every Visa transaction.
Visa was traditionally a method for consumers to make payments to businesses. But increasingly it is also involved in person-to-person payments, business-to-business payments, business-to-consumer payments and even some government-to-person payments.
In the volatile year that was 2020, Visa was up 16%. In 2021 it was down a modest 1%. But in 2022 to date, it’s down 6.1%. With the economy and travel reopening, Visa’s earnings in the most recent two quarters were about 28% higher than the prior year.
The trailing price to adjusted earnings ratio at 30 remains expensive although it has declined. The analyst forward p/e ratio is only moderately expensive at 24. The return on equity is extraordinarily good at 39%. Overall, Visa is somewhat richly valued, but this is justified by its extremely favorable profitability and growth.
The dividend yield is very low at 0.7%, partly due to the low earnings payout ratio of 22% but also due to the high valuation in relation to earnings. The dividend was recently increased by 17% to $0.375 ($1.50 per year). The dividend yield is 0.7%.
Earnings will likely grow relatively strongly in the next two quarters as travel and spending on restaurants and other services have recovered from the pandemic. The medium-term outlook is positive as Visa continues to benefit from the move to electronic payments and as it also increases its presence in person-to-person transfers and business-to-business payments.
Visa’s very success and extremely high margins put it at risk for disruption by emerging fintech companies, as well as for increased regulation of its fees. Visa has acquired several fintech companies. This appears to be a defensive move against possible future disruption to the payments industry.
Visa remains centrally and dominantly positioned in the world of electronic payments and, with travel back to record levels. is set to continue to grow faster than the overall economy. While it is potentially vulnerable to disruption and competition, its competitive position remains extremely strong at this time. We rate the stock a buy.