Visa's stock is at an all-time high, yet many top investors are still purchasing at these record levels. Why is that? Is it simply a safe investment with little risk of loss, or does Visa still have room for growth? In this video, we'll apply our seven-step analysis to explore why Visa remains such an appealing investment, even at its peak, and what the future might hold for this outstanding company.
Visa is a major player in the digital payments space, enabling both individuals and businesses to transfer money through its extensive network, VisaNet. The company processes transactions across more than 200 countries, and in 2022 alone, it handled around 24.42 billion payments valued at approximately $13 trillion.
Let’s begin with a look at Visa’s stock history. If you had invested $11,000 in the company 10 years ago, you would have purchased 16 shares. Today, those shares would be worth about $4,910. Visa also pays dividends, so over that period, you would have received $179 in dividends. Adding the current value of the shares and the dividends together gives us a total of $5,091, which represents a 49% gain over 10 years. Considering Visa’s strong market position, this return is quite impressive.
Now, let’s take a look at who’s benefiting from these results. Individual insiders own less than 0.1% of the company, meaning the management doesn’t have much skin in the game. Additionally, there have been more sell transactions than buys among insiders. On the other hand, super investors are heavily invested in Visa, making it the fifth-most-owned stock among this group. Notable investors like Terry Smith, Chu Aaki, and Franu Ron are among those currently buying. In the last quarter, they purchased 4.6 million shares while selling just under 3 million shares.
Let’s explore why so many investors are buying shares of a company when its stock is at an all-time high. First, let's look at the return on invested capital, which is an impressive 21.4%. Over the last decade, this number has consistently outperformed the 10% threshold we like to see, signaling strong management performance.
Now, let’s talk about Visa’s net profit margin, which averages 51.9% over the past five years, compared to the sector’s median of 22%. Notably, Visa holds the highest margin in the entire industry.
Looking at share buybacks, Visa has repurchased 20.7% of its shares in the last 10 years. This means long-term investors now own a larger portion of the company without having to invest additional cash. When it comes to debt, Visa is in a strong position—it would only take a little over a year to pay off its long-term debt using its current free cash flow. This is clearly not an issue for the company.
So far, everything checks out, but financial health is only part of the picture. Growth is another key factor. Visa’s revenue has grown at a compound annual growth rate (CAGR) of 11% over the past 10 years, which is right on the mark for what we like to see. Free cash flow has grown at 10.9% over the same period, and earnings per share (EPS) have increased by 16.2%. The higher EPS growth can be attributed to share repurchases, as fewer shares means each one represents a bigger portion of the earnings.
As for shareholder value, Visa offers a dividend yield of 0.7%, or $236 annually per share. While this isn't a high yield, the dividend’s security is strong, with a payout ratio of 21.4%. This indicates that Visa is paying out a reasonable portion of its earnings as dividends, while retaining almost 80% for reinvestment in the company. Additionally, the company has shown an impressive 15.4% five-year dividend growth rate, and it has been raising its dividend every year for the last 16 years.
Now that we know how strong and fast-growing this company is, let’s talk about valuation. The price-to-earnings (P/E) ratio is currently 30.9, meaning investors are paying over $30 for every dollar of earnings. While this might seem high, a simple valuation method like the P/E ratio can sometimes be misleading. To get a clearer picture of Visa’s true value, let’s conduct a discounted cash flow (DCF) analysis.
To do this, we’ll estimate Visa’s growth over the next decade. In the low scenario, we expect 9% growth for the first five years, followed by 8% growth. The medium scenario assumes 11% growth for both periods, while the high scenario predicts 13% growth initially, with a slight acceleration to 12% growth later on.
With these estimates, the intrinsic value in the low scenario comes to $186, in the medium scenario $216, and in the high scenario $251. However, we need to apply a margin of safety to these values. Using a 30% margin of safety, we get a range of $130 in the low scenario, $151 in the medium, and $176 in the high. Given that the current price is around $37, Visa appears to be significantly overpriced right now.
Let’s put everything into perspective and try to understand why, despite Visa’s clear high valuation, super investors are still buying. Visa certainly boasts strong financial health, and its dominant position in the market makes it a very secure investment. On the other hand, it’s undeniably expensive, but at least we know what we're paying for. While it might be pricey, Visa is a high-quality company.
Conclusion
It’s clear that Visa stands out as an exceptional company. Everything about it looks top-notch. let’s take a closer look at its history. Revenue has shown steady and stable growth, free cash flow has had a few bumps but remains on a positive trajectory, earnings per share have been consistently growing, and dividends have been steadily increasing.
I believe the main reason why super investors are still so drawn to Visa, even at these high prices, is that it’s an extremely predictable company that continues to grow in sync with the global economy. It’s unlikely that anyone will disrupt its growth in the years ahead. So, when you invest in Visa, you’re not just paying for quality, but also for the security that comes with such a stable investment.
Thanks for reading, and I’ll see you in the next one!
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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