Visa Inc.
VISA has been growing its revenues and earnings per share very rapidly and steadily for many years. The earnings line is not far below the revenue line which reflects the fact that much of the revenue falls to the bottom line as profit. Book value per share has grown despite substantial share buybacks.
| VISA (V) | |
| RESEARCH SUMMARY | |
| Report Author(s): | InvestorsFriend Inc. Analyst(s) |
| Author(s)’ disclosure of share ownership: | The Author(s) hold no shares |
| Based on financials from: | Sept. 30, ’23 Y.E. |
| Last updated: | December 31, 2023 |
| Share Price At Date of Last Update: | $ 260.35 |
| Currency: | $ U.S. |
| Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): | (lower) Buy at $260 |
| Qualifies as a stock that could be bought with confidence to hold for 20 years? | Yes! |
| Has Wonderful Economics? | Yes! |
| Has Excellent and Trustworthy Management? | Yes |
| Likely to grow earnings per share at an attractive rate over the next decade? | Yes |
| Positive near-term earnings outlook? | Yes |
| Valuation? | Moderately Expensive |
| SUMMARY AND RATING: This “cell” summarizes information from other cells below. The graph of revenue per share shows strong steady growth with only a little pause for the pandemic in 2020 and with a very impressive average annual growth of about 13% annually! Earnings per share have grown even faster than that with only a modest dip for the pandemic. The economics of this business are superb as it acts as a sort of electronic toll bridge on all VISA transactions. In the next year, growth is likely to moderate from the recent level to something closer to perhaps a 10% level. In the longer term, the payments volume seems sure to grow although regulation could possibly impede growth. In particular there is some risk that fees will be driven lower and this is elevated by a recent battle with Amazon over fees although that was resolved on unknown terms. New technologies could also make it easier for merchants to accept other forms of payment including easier use of debit cards for online purchases. The value ratios in isolation suggest a rating of (lower) Buy. The industry seems very attractive to VISA as an incumbent and the company does reasonably well on the Buffett tenets. It has very strong competitive advantages and operates with oligopoly and even some monopolistic characteristics. Appears to have strong management. There are some risks due to regulation of prices and strong players like Amazon negotiating lower fees. Overall, noting its competitive advantages and noting a somewhat high valuation and risk to fees we rate it a (lower) Buy. It is a stock that could be bought and held for the very long term. If it happens to dip to or below the $230 level that would be a better buying opportunity but that may or may not happen. | |
| MACRO ENVIRONMENT: Travel has rebounded very strongly and this benefits card spending as well as lucrative currency transfer fees. Inflation automatically adds to VISA’s revenues. But the forecast recession is a possible headwind. | |
| LONG TERM VALUE CREATION: VISA has created extraordinary value for its owners over the years. | |
| DESCRIPTION OF BUSINESS: (Updated January 2023) Everyone has some familiarity with VISA but it is not so easy to concisely describe Visa Inc. Visa Inc. is the entity that sits at the top of the vast VISA credit and debit card operation. VISA Inc. itself does not issue credit cards but it processes much of the data and effectively collects license fees and “toll charges” on every VISA transaction. Its clients are banks that issue the credit cards and groups that acquire (sign-up) and deal with the merchants (Moneris – owned by Royal Bank and BMO, Chase Paymenttech, Chase payments, Desjardins Monetico, TD Merchant Solutions) . VISA operates the world’s largest retail electronic payment system service and payment product platform. This includes consumer credit, debit, prepaid and commercial payments. VISA operates world wide. VISA is essentially a replacement for paper money, cheques and other forms of electronic transfer and it wants to continue to be the “currency” of choice. It is important to understand that VISA does not take consumer credit risk. It operates as something of an electronic toll booth collecting fees on every VISA credit and debit transaction. Its revenues are mostly for licensing of the VISA brand to its bank and acquierer customers, data processing fees and (lucrative) foreign currency translations fees. It effectively collects a toll on each transaction on its system. In Fiscal year 2019 (ended September 30) revenues were 45% from the U.S. and 55% from the rest of the world. The company estimates that among the major card companies (this appears to exclude China and some other relatively closed countries) for calendar 2021 had a market share of 58% of the payments volume and 58% of the cards issued (both down about 1% versus 2018). VISA has 26,500 employees (up 23% in 2022!) in 130 office and data centers around the world and an equity market value (as of January 2023) of $476 billion. | |
| ECONOMICS OF THE BUSINESS: The economics of this business are superb. Over a 64 year period (since 1958) Visa Inc. and its predecessors have established credit cards as a dominant form of payment and more recently developed a strong debit card business. And they have moved into other areas including business-to business payments and currency transfers. Visa Inc. is at the center of this functioning like an electronic toll booth. It has monopolistic characteristics. The business economics could be eroded in future through regulation of prices (which already occurs to some degree) or through technology allowing more competition. At present however, the economics continue to be wonderful. As of Q1 fiscal 2023, the trailing adjusted profit ROE was 46%. Net profit as a percentage of revenue was 55% after deducting income tax! | |
| RISKS: Please refer to the annual report for a complete discussion of the risks listed by VISA. An emerging risk is a push by Amazon for lower fees. If this only affects Amazon then the damage may be modest but if it spreads this could be a big risk. The largest risks appear to be that its fees will become even more regulated and that it could lose certain lawsuits against it. There may be risks due to changing technology as well that may lead to more competition. But overall this does not appear to be a highly risky company in terms of its earnings level. | |
| INSIDER TRADING / INSIDER HOLDING: There has been significant insider selling but insider selling is not much concern since insiders receive options as compensation and naturally they do sell over time. Overall, a moderately negative signal. | |
| WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand (pass, positioned as essentially a toll booth on credit and debt card transactions although the vulnerability to regulation and technology changes is uncertain), has favorable long-term economics due to cost advantages or superior brand power (pass, Visa has almost monopolistic characteristics as most retailers and vendors have no real choice but to accept its cards), apparently able and trustworthy management (pass), a sensible price – below a conservative estimate of intrinsic value (marginal pass given the high P/E ratio but noting the high ROE and growth), Other criteria that have been attributed to Buffett include: a low debt ratio (pass, little debt), good recent profit history (pass), little chance of permanent loss of the investor’s capital (marginal pass, there is almost no hard assets and if regulation lowered its fees then a large share price decline is possible although this seems unlikely) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass). | |
| MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings growth in the last four quarters starting with the most recent being Q4 fiscal 2023 (ended September 30, 2022) was 21%, 9%, 17% and 21% (and this was on top of even stronger gains in the prior year). Figures for revenue per share growth in these same four quarters were 13%, 14%, 14% and 15% (again on top of even higher gains in the prior year). In fiscal 2023 ended September 30 , adjusted earnings per share were up 17% and revenues per share were up 14%. In fiscal 2022 ended September 30 , adjusted earnings per share were up 27%! and revenues per share were up 25%. In part, 2023 and 2022 were still benefiting from a rebound from the pandemic, but even 2021 had already rebounded to a good degree. In fiscal 2021 ended September 30, , adjusted earnings per share were up 17% and revenues per share were up 12%. Historical figures: In fiscal 2020, adjusted earnings per share declined 7.5% due to the pandemic and revenues per share were down 3%. Fiscal 2019 had adjusted EPS growth of 18% and revenue per share growth of 14%. Fiscal 2018 had adjusted EPS growth of 32% (boosted by the lower tax rates) and revenue per share growth of 15%. Overall, the recent earnings and revenue trend is extremely positive. Historical figures: In fiscal 2020, adjusted earnings per share declined 7.5% due to the pandemic and revenues per share were down 3%. Fiscal 2019 had adjusted EPS growth of 18% and revenue per share growth of 14%. Fiscal 2018 had adjusted EPS growth of 32% (boosted by the lower tax rates) and revenue per share growth of 15%. | |
| INDUSTRY SPECIFIC STATISTICS: | |
| Earnings Growth Scenario and Justifiable P/E: The current trailing adjusted earnings P/E of 30 requires significant continued growth to justify it. | |
| VALUE RATIOS: (Based on a $260 share price.) The price to book value is nominally unattractive at 14 times. But this is not at all a company that is valued for its assets. The trailing adjusted earnings P/E at 30 is, on its face, unattractive but that depends on the future earnings growth rate and on long-term interest rate levels. The P/E based on analyst projected forward earnings is also quite high at 26 and analysts earnings estimates are often optimistic. It appears that analysts are expecting continued double digit growth in the next year. The dividend yield remains very low at 0.8% despite recent dividend increases. The dividend is low partly due to the low pay out ratio of just 23% of trailing earnings but mostly due to the high price to earnings ratio. The adjusted return on owners book equity (ROE) is extremely (extraorinarily, really) good at 49%. Earnings per share growth in the past five fiscal years was very strong at a compounded annual average of 14% and that is in spite of the impact of the pandemic. Assuming that earnings per share grow at just 6% annually for five years and the P/E declines to 20, we calculaten intrinsic value per share of only $177 – but that is probably too pessimistic. This rises to $287 if we assume annual growth of 12% annually and that the P/E declines to only 25 given the extremely strong business model and relative lack of competition. The ratios indicate that this is a very strong company but also that it is not bargain priced but might be considered fairly priced. Overall we think the value ratios, would indicate a (lower) Buy rating. A good stock to hold or to add to modestly and one to definitely add to if it happens to dip to say $230 which will likely only happen if there is a broad stock market decline. | |
| TAXATION: Nothing unusual for a U.S. stock. Canadian investors are subject to the 15% dividend withholding tax except in RRSP / RIF accounts but this is a low dividend stock. It’s also not eligible for the Canadian dividend tax credit. | |
| SUPPORTING RESEARCH AND ANALYSIS | |
| Symbol and Exchange: | VISA, US |
| Currency: | $ U.S. |
| Contact: | www.ir@visa.com |
| Web-site: | www.visa.com |
| INCOME AND PRICE / EARNINGS RATIO ANALYSIS | |
| Latest four quarters annual sales $ millions: | $32,653.0 |
| Latest four quarters annual earnings $ millions: | $17,273.0 |
| P/E ratio based on latest four quarters earnings: | 31.4 |
| Latest four quarters annual earnings, adjusted, $ millions: | $18,280.0 |
| BASIS OR SOURCE OF ADJUSTED EARNINGS: Uses adjusted earnings as reported in the earnings press releases. | |
| Quality of Earnings Measurement and Persistence: Earnings quality and persistence are extremely good. | |
| P/E ratio based on latest four quarters earnings, adjusted | 29.7 |
| Latest fiscal year annual earnings: | $17,273.0 |
| P/E ratio based on latest fiscal year earnings: | 31.4 |
| Fiscal earnings adjusted: | $18,280.0 |
| P/E ratio for fiscal earnings adjusted: | 29.7 |
| Latest four quarters profit as percent of sales | 56.0% |
| Dividend Yield: | 0.8% |
| Price / Sales Ratio | 16.62 |
| BALANCE SHEET ITEMS | |
| Price to (diluted) book value ratio: | 13.88 |
| Balance Sheet: (Updated as of December 31, 2022) Since it trades at 13 times book value, VISA’s balance sheet is of no real relevance other than to note that it is a strong balance sheet. Assets are mostly purchased intangibles (goodwill and equivalent) at 52% of assets, these arose when VISA became publicly traded and was effectively purchased from the banks that formerly owned it and also with the purchase of VISA Europe. Property plant and equipment which includes technology (software) comprises only 4% of assets. The great majority of the remainder is made up of cash (18% of assets), investments and receivables. The assets are financed 43% by equity, 24% by debt, 6% by deferred income taxes and the remainder is payables and accrued liabilities and longer term liabilities. This is a very strong balance sheet especially considering that the debt as a percentage of the market value of the equity is only 4%. Visa Inc. could easily increase its debt leverage at will. | |
| Quality of Net Assets and Book Value Measurement: The company is valued for its earnings and market position, not for its assets. The majority of its balance sheet assets is the purchased cost of intangible goodwill and equivalent arising mostly when Visa Inc. became a publicly traded company and also arising from the purchase of Visa Europe. | |
| Number of Diluted common shares in millions: | 2,065.0 |
| Controlling Shareholder: There is no controlling shareholder however many of the financial institutions are large holders of shares as a result of converting their previous ownership structure from when the company was not publicly traded. | |
| Market Equity Capitalization (Value) $ millions: | $537,622.8 |
| Percentage of assets supported by common equity: (remainder is debt or other liabilities) | 45.4% |
| Interest-bearing debt as a percentage of common equity | 53% |
| Current assets / current liabilities: | 1.5 |
| Liquidity and capital structure: The company has strong financial liquidity. | |
| RETURN ON EQUITY AND ON MARKET VALUE | |
| Latest four quarters adjusted (if applicable) net income return on average equity: | 49.2% |
| Latest fiscal year adjusted (if applicable) net income return on average equity: | 49.2% |
| Adjusted (if applicable) latest four quarters return on market capitalization: | 3.4% |
| GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE | |
| 5 years compounded growth in sales/share | 12.1% |
| Volatility of sales growth per share: | Strong and steady |
| 5 Years compounded growth in earnings/share | 13.4% |
| 5 years compounded growth in adjusted earnings per share | 13.7% |
| Volatility of earnings growth: | Strong and steady. |
| Projected current year earnings $millions: | not available |
| Management projected price to earnings ratio: | not available |
| Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted) earnings per share? | Yes |
| Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: | 37.6% |
| More conservative estimate of compounded growth in earnings per share over the forecast period: | 6.0% |
| More optimistic estimate of compounded growth in earnings per share over the forecast period: | 12.0% |
| OUTLOOK AND AMBITIONS FOR BUSINESS: After growing very strongly indeed over the past eight quarters, VISA’s earnings per share growth will likely be lower in the next year but will still likely be in the double digits. Increased online shopping and the displacement of (germy) paper cash continues to be a growth factor. And VISA continues to aggressively pursue growth in payments between businesses and from governments to consumers and well as in person to person cross-currency transfers. | |
| LONG TERM PREDICTABILITY: While nothing in life is certain, Visa seems likely to continue to grow as electronic commerce grows. It is also growing rapidly in non-credit areas including business-to-business payments, and currency transfers. However regulations and competition and more recently efforts by Amazon could curtail its monopolistic profit levels. | |
| Estimated present value per share: We calculate $177 if adjusted earnings per share grow for 5 years at the very conservative rate of 6% and the shares can then be sold at a much reduced P/E of 20 and $277 if adjusted earnings per share grow at the more optimistic rate of 12% average annually for 5 years and the shares can then be sold at P/E of 25 (reflecting continued relatively low long-term interest rates and the quality of the company). Both estimates use a 7.0% required rate of return. | |
| ADDITIONAL COMMENTS | |
| INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (pass, it would be extremely difficult to develop a new competing world-wide credit card that multiple international financial institutions will contract with and that millions of retailers would accept). No issues with powerful suppliers (partial pass, there are two major financial institutions that account for about 20% of the volume. Also some major retailers (notably Costco and apparently Amazon) have bargaining power by choosing to favor Visa versus MasterCard – although the vast majority of retailers will continue to accept both cards). No issues with dependence on powerful customers (pass, there is a world-wide population of customers), No potential for substitute products (pass, people need credit cards and in many cases there is no realistic substitute, although perhaps debit cards linked to lines of credit could be a substitute at some point) No tendency to compete ruinously on price (pass). Overall this industry appears to be very attractive to this incumbent although new technologies or regulation could change the picture. | |
| COMPETITIVE ADVANTAGE: VISA has agreements with most of the major financial institutions, banking central payment systems, world wide retailer and its consumer network is not replicable by many organizations. It is in an oligopoly position with MasterCard. The VISA card is recognized world-wide. With consumers VISA credit cards are an oligopoly since each consumer is almost obligated to carry VISA or MasterCard. With retailers VISA credit cards seem to be virtually a monopoly as many retail businesses have no real choice but to accept VISA (Costco has been a rare exception). With Banks VISA credit card is an oligopoly. Visa benefits greatly from “the network affect”, retailers need to accept the cards because so many consumers carry the card and consumers carry the card because so many retailers accept it. On the debit card side, the market power is not as strong and there are more competitors. It also faces competition in business to business payments and the currency transfer business that it trying to grow. | |
| COMPETITIVE POSITION: Visa along with MasterCard are the two dominant credit cards. American Express is a respectable third in dollar terms. Discover JCB (Japan) and Diner’s club have modest shares of the market. The 2022 annual report indicates that in calendar 2021 Visa had 58% of the total cards issued and 59% of the payments dollar volume. This excludes Russia and China where Visa is or was excluded. On debit payments, and other ways to make payments there are other competing payment processors but we don’t have the market share figures. | |
| RECENT EVENTS: In Canada, companies are now allowed to surcharge for credit card payments. Retailers are unlikely to do so because of consumer backlash. But some companies attempted to do so. This practice may be occurring in other countries as well. VISA has been repurchasing its shares and reducing its share count at a recent rate of 3% to 4% of the shares per year. VISA has purchased a number of Fintech companies including two in fiscal 2022 (Tink and CurrencyCloud). These do not appear to be material to revenues or earnings but could be important at some point. VISA continues to benefit from and to drive the movement from cash and cheques to digital payments. VISA has made Fintech acquisitions and is attempting to offer more options for mobile payments. VISA has expanded the ability of consumers to transfer money using Visa (Visa Direct) and this has increased its payments volume. 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 and business to consumer payments as well as government to consumer payments. | |
| ACCOUNTING AND DISCLOSURE ISSUES: We like their press releases which gives the most important numbers in a concise summary. We like that they usually provide adjusted earnings, although it may not adjust for some other important items. Their statements about Visa Inc. not receiving any portion of interchange reimbursement fees and merchants not paying those fees while no doubt technically true, did not seem to present the situation in a way that struck us as completely true in substance. In fact, they admit that in many jurisdictions they have historically set the default interchange reimbursement fees. There may be an issue with how to account for the preferred share dividends. | |
| COMMON SHARE STRUCTURE USED: There are Class A, B, and C shares as well as preferred shares. This is complex. However, the earnings per diluted share figures are as if all shares were converted to Class A and so this complex share structure is not of concern to us. | |
| MANAGEMENT QUALITY: Corporate performance suggests management is quite competent. | |
| Capital Allocation Skills: With a price to book ratio of 14 it is evident that Visa has certainly made good returns on past investments. Its dividend and buy-back policies seem to have worked out well. It has favored buy-backs over increasing the dividend and, given the share price performance, this has worked out well. | |
| EXECUTIVE COMPENSATION: Total CEO compensation in fiscal 2022 was $28 million. The four others ranged from $9 to $17 million. Most was in the form of stock compensation – possibly to lower and defer income taxes. Overall, given the size of the company, executive compensation, although enormous for the CEO, is not a big concern. | |
| BOARD OF DIRECTORS: (Updated January 2023) Includes 10 members composed of highly regarded and experienced members from a variety of industries. These people are probably not financially particularly reliant on their Board compensation from Visa. Base compensation, excluding committee work and stock compensation, is $110k which is relatively modest. However, total compensation was about $400k per member. Overall it is probably a good Board. | |
| Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. | |
| DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice. | |
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