Hopes of investors that the Federal Reserve could lower interest rates in response to moderating inflation were dashed by red-hot employment data and recent comments from Fed officials. Moreover, initial jobless claims rose last week, and unemployment remained historically low.
The resilience demonstrated by a tight labor market fueling a robust economy, although usually a reason for the Street to cheer, prompted concerns that the Fed might decide to continue tightening monetary policy further than previously thought.
According to Niall O’Sullivan, the chief investment officer of multi-asset strategies for Europe, the Middle East, and Africa at Neuberger Berman, Inflation is going to be harder to tame. Central banks will have to be at it much longer than many people think.” He also added that it could be years rather than months before inflation is properly curbed.
Moreover, due to high borrowing costs and softened demand due to decreased discretionary expenditure, companies in the S&P 500 are set to report a 5% decline in profit, according to a blend of actual results and estimates for those yet to report. That would mark the first quarterly earnings decline since the depths of the Covid-19 pandemic in 2020.
Amid this turbulence, investing in shares of fundamentally strong, time-tested, and profitable businesses, such as Visa Inc (V), could ensure consistent, risk-adjusted returns.
As a global payments technology company, V connects consumers, merchants, financial institutions, businesses, strategic partners, and government entities to electronic payments.
Over the past three years, V’s revenue has grown at an 8.7% CAGR. During the same period, the company also registered EBITDA and net income growth of 8.8% and 7%, respectively.
The stock has gained 4.3% over the past month and 9.1% over the past six months to close the last trading session at $230.20, higher than its 50-day and 200-day moving averages of $216.91 and $205.50, respectively.
Let’s closely examine the factors that make it worthy of investment.
Strong Business Performance
During the first quarter of the fiscal year 2023, which ended December 31, 2022, V’s net revenues increased 12.4% year-over-year to $7.94 billion. This growth was driven by year-over-year increases of 10% in the number of processed transactions and 7% and 22% in payments volume, and total cross-border volume in constant dollars.
During the same period, V’s operating income increased 6.6% year-over-year to $5.10 billion, while its non-GAAP net income increased 17.4% year-over-year to $4.58 billion. As a result, the company’s non-GAAP EPS came in at $2.18, up 20.4% year-over-year.
Consistent Return of Capital to Shareholders
V’s robust financials and strong performance have enabled it to return $4 billion of capital to shareholders through share repurchases and dividends.
During the fiscal 2023 first quarter, V repurchased 15.6 million shares of class A common stock at an average price of $198.74 per share for $3.1 billion. The company still had $14.0 billion of authorized funds left for share repurchase as of December 31, 2022.
On January 24, V announced a quarterly cash dividend of $0.45 per class A common share, payable on March 1, 2023.
V pays a dividend of $1.80 per share annually. This translates to a forward yield of 0.78% at the current price, higher than the 4-year average dividend yield of 0.62%. The company pays out 20.94% of its earnings as dividends.
The company’s dividend payouts have increased for 14 consecutive years. Its dividend payouts have grown at 17.6% CAGR over the past five years.
Excellent Capital Allocation by Management
V’s trailing 12-month gross profit margin of 97.58% is higher than the industry average of 49.18%. Also, the company’s trailing-12-month EBITDA margin and net income margin of 70.09% and 50.28% comfortably exceed the industry averages of 11.14% and 3.19%, respectively.
Additionally, V’s trailing-12-month ROCE, ROTC, and ROTA of 43.63%, 22.12%, and 17.77% compare favorably to the respective industry averages of 4.87%, 3.01%, and 1.47%.
Optimistic Analyst Estimates
For the fiscal 2023 second quarter, ending March 31, 2023, analysts expect V’s revenue to increase 7.9% year-over-year to $7.76 billion. During the same period, the company’s EPS is also expected to increase 10.6% year-over-year to $1.98.
For the entire fiscal, V’s revenue and EPS are expected to increase 10.2% and 12.7% year-over-year to $32.29 billion and $8.45, respectively.
Moreover, V has impressed by topping consensus estimates in each of the trailing four quarters.
POWR Ratings Reflect Robustness
V’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. V has an A grade for Quality, consistent with its higher-than-industry profitability.
V also has a B grade for Stability and Sentiment, as reflected in its beta of 0.96 and optimistic analyst estimates.
V ranks #4 of 48 stocks in the Consumer Financial Services industry.
Click here to see the additional POWR Ratings for V’s Growth, Value, and Momentum.
Bottom Line
With an optimistic outlook for 2023, On February 1, Ryan McInerney assumed the role of CEO, while Alfred F. Kelly, Jr., who has served as the company’s CEO since 2016 and Chairman since 2019, assumed the role of Executive Chairman of the Board.
Moreover, with President Joe Biden announcing measures to limit penalties related to credit card usage in his latest State of the Union (SOTU) address, a potential increase in the volume and number of transactions bodes well for V.
In addition, robust financials, capital discipline, and profit-sharing track record make V an attractive investment option for solid risk-adjusted returns.
How Does Visa Inc. (V) Stack up Against Its Peers?
In addition to V, which has an overall POWR Rating of B, investors could also consider looking at its B-rated industry peers: AssetMark Financial Holdings, Inc. (AMK), Regional Management Corp. (RM), and MainStreet Bancshares, Inc. (MNSB).
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V shares were trading at $227.45 per share on Friday afternoon, down $1.90 (-0.83%). Year-to-date, V has gained 9.69%, versus a 6.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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