Visa Stock Analysis – 15% Growth Per Year Will Deliver 15% Returns
This Visa stock analysis (NYSE:V) will show how Visa is the ultimate compounder. Visa’s revenue keeps growing, earnings and cash flows too, that leads to constantly higher dividends while the market for Visa simply keeps increasing thanks to global economic growth. I have two bank accounts; one is Visa the other is MasterCard. I think if you open your wallet, you’ll find a similar distribution.
If that keeps up, it is likely Visa’s stock performance will also keep up. However, if the growth doesn’t hold up, it can get ugly because the valuation of growth stocks depends on the delta of the delta, not just the delta. In other words, the change in the growth is what impacts stock returns, not so much the growth by itself. If you wish to learn how to analyze growth stocks and what is the most important factor when it comes to analyzing the investing risk and reward of growth stocks, please check my How to analyze growth stocks article.
Visa Stock Performance
When you look at what Visa did in the past, it is simply amazing. Over the last decade, revenues grew 200%, net income quadrupled and the dividend was increased by a factor of 10.
Visa stock financials – Source: Visa Stock Morningstar
With such financial metrics, the only outcome for a stock is to skyrocket.
Visa stock price performance
Visa stock analysis and valuation
On the other hand, it also comes with a high valuation and low dividend. The whole game with Visa stock is that it has to continue to grow and compound. As soon as that stops, it will be a big hit for the stock too.
Fortunately for Visa stock holders, the company just keeps on giving and giving. They have a low dividend payout ratio of around 20% because they can reinvest capital at rates above 20%.
Visa stock profitability – Source: Visa Stock Morningstar
The company has all what you can dream about when it comes to investing; growing revenues, a high margin, high return on invested capital alongside constantly growing distributions to shareholders. Apart from the dividend, the number of Visa stock outstanding fell from 3 billion to 2.2 billion over the last 10 years. That is almost 30% less than the number of Visa stocks outstanding in 2009!
Visa stock business performance – Source: Visa Stock Investor relations
Visa stock outlook
The outlook is simple when it comes to Visa stock. For as long as the company can keep growing earnigns at 15% per year, the stock will follow.
Visa stock earnings outlook – Source: Visa Stock Investor relations
Visa stock investment analysis
When it comes to investing, it all depends on traffic and growth. If there is an economic halt, Visa’s traffic and profitability could stagnate for a while and consequently the stock would stagnate too. Visa is definitely a business that compounds, but I would say fairly priced given the PE ratio of around 30. If earnings continue to compound at 15% per year, the PE ratio on the current price will be just 15 in 5 years and just 7.5 in 10 years. If Visa’s business keeps growing at 15%, the stock will follow and the PE ratio will remain close to 30 while investors will enjoy returns around 15%.
Visa earnings analysis
However, if Visa’s growth falls to 10% per year, earnings per share in 5 years will be $8.56 and $13.79 in 10 years. Plus, it is likely the market will not value a company growing at 10% in the same way it values it now, with a PE ratio of 30. If the valuation falls to 20, the stock price would be at $171 in five years and investors would see zero returns over the coming years.
This is the biggest risk when it comes to investments like Visa. It is not so much about the growth, the so called delta, but it is about the delta of the delta, or change in the growth rate, that significantly affects future returns.
So, the only question is: Will Visa continue to grow so fast?
As I have no crystal ball, I don’t know about Visa’s future growth so I simply avoid such investments at such high levels where a business needs to keep on growing at 15% for 10 years to just reach my required business return of 15% per year. Too much risk for me. Many businesses showed similar growth and compounding power in the past but at some point the growth stopped and the stock appreciation too. One example is Henkel’s stock.
This is what I do, I am always looking for great businesses, that offer both value and growth and can also do good over cycles. Visa is a bit too pricey for me, but if you wish to check my portfolio, check my Stock Market Research Platform.
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