In my December 2, 2021 Visa (V) post, I lay out why I considered it to be an attractive long-term investment. I followed up this post with my April 27, 2022 post at Financial Freedom Is A Journey in which I suggested accumulating V shares on pullbacks. Now, Visa’s attractive valuation makes it a ‘Buy’. NOTE: This post is composed following the December 7 market close.
For the sake of full disclosure, V was my largest holding when I completed my Mid-2022 Investment Holdings Review; it remains my largest holding.
I never cease to be amazed at how some investors will invest in utter garbage yet a company like V holds no appeal. Following my previous posts, a few readers disagreed with my conclusion about V being a wise investment for the long term and vehemently argued cryptocurrencies would displace V.
Given what has transpired in the world of cryptocurrencies of late, I am relieved these people were unable to change my opinion.
When I think of cryptocurrencies I can not help but draw a parallel to Tulipmania. This is the famous market bubble and crash in Holland in the 1600s when speculation drove the value of tulip bulbs to extremes. At the market’s peak, the rarest tulip bulbs traded for as much as six times the average person’s annual salary.
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Rather than take on direct crypto risk, my investment in Visa allows me to participate in this ‘new virtual world’. Visa has a far better grasp of how cryptocurrencies may impact its business. As a result, it is doing what is necessary to stay relevant should cryptocurrencies end up being a legitimate form of payment.
Should cryptocurrencies become a legitimate storage of value in the future and become mainstream, I stand to benefit through Visa’s involvement. Until this happens, however, I know that Visa is unlikely to make similar headlines as those made by FTX, Celsius Network, BitPanda, BlockFi, Coinbase, Binance, Gemini, Bitso, and Voyager Digital.
In contrast to these firms, Visa at least makes an effort to warn consumers about fraud.
This brief review focuses primarily on Visa’s valuation since nothing about the company has fundamentally changed following my prior reviews.
Q4 and FY2022
V’s FY2022 performance was very strong despite the uncertainty created by:
- the war in Ukraine;
- the timing of cross-border travel recovery; and
- a potential recession
FY2022 net revenues were up 22% YoY and non-GAAP EPS of $7.50, was up 27% YoY.
Free Cash Flow (FCF)
V continues to rigorously prioritize investment plans and manage expense growth in line with revenue growth expectations.
This is a long-cycle business. Investments made today typically have revenue growth 2 – 3 years in the future. As a result, V must continue to fund key growth initiatives across consumer payments, new flows and value-added services.
V’s FY2011 – FY2022 annual FCF (in billions) is ~$3.52, ~$4.63, ~$2.55, ~$6.65, ~$6.17, ~$5.05, ~$8.61, ~$12.22, ~$12.03, ~$9.70, ~$14.52B, and ~$17.9B.
It is extremely difficult not to like a company whose net cash provided by operating activities in FY2022 is $18.849B and CAPEX over the same timeframe is $0.97B.
Current plans are for low double-digit non-GAAP operating expense growth in constant dollars. Tink and Currencycloud, two acquisitions covered in my April 2022 post, are expected to add to V’s expense growth but this will be somewhat offset by the discontinuation of V’s Russia operations and exchange rate changes.
With the increase in interest rates, V’s non-operating expense will benefit from higher interest income from its cash balances.
Current non-operating expense expectations are in the $0.2B – $0.25B range in FY2023.
As a relatively risk-averse investor, I pay particularly close attention to a company’s liabilities. This includes an assessment of the maturity schedule of a company’s credit facilities and credit ratings.
V’s debt maturity schedule is well-balanced. I do not envision V being unable to meet its obligations under the negotiated terms and conditions.
Moody’s and S&P Global also have a similar outlook on V’s credit risk. The credit ratings and outlook assigned to V’s unsecured domestic long-term debt remain unchanged from when I last reviewed the company in April 2022.
- Moody’s: Aa3 (stable)
- S&P Global: AA- (stable)
These ratings are the lowest tier of the high-grade investment-grade category and define V as having a VERY STRONG capacity to meet its financial commitments. The ratings differ from the highest-rated obligors only to a small degree.
These ratings are acceptable for my conservative investor profile.
Dividends and Share Repurchases
Dividend and Dividend Yield
V’s dividend history is accessible here.
At the time of my April 27 post, V’s quarterly dividend was $0.375/share. With shares trading at ~$214, the dividend yield was ~0.7%.
On October 21, 2022, V’s Board declared a 20% increase in the quarterly cash dividend to $0.45/ share. According to Portfolio Insight*, this was the 14th consecutive increase thereby making V a Dividend Contender. With shares currently trading at ~$207, the new dividend yield is ~0.87%.
Although the low dividend yield may dissuade many investors from investing in V, investors should focus on an investment’s total potential investment return versus dividend metrics. The dividend portion of the return can oftentimes be only a small component of the total return.
Dividends distributed in FY2018 – FY2022 amount to $1.918B, $2.269B, $2.664B, $2.798B, and $3.203B. There is nothing that suggests V will be unable to continue to increase its dividend over the foreseeable future.
In FY20202 – FY2022, V repurchased $8.114B, $8.676B, and $11.589B of class A common stock; this is the class of common stock that is actively traded.
Details of V’s 3 classes of shares are found on page 89 of 128 in the FY2022 Form 10-K.
The weighted average number of Class A diluted shares outstanding in FY2013 – FY2022 (in millions of shares) is 2,624, 2,523, 2,457, 2,414, 2,395, 2,329, 2,272, 2,223, 2,188, and 2,136.
In January 2021, V’s Board authorized an $8B share repurchase program. In December 2021, it authorized an additional $12B share repurchase program (December 2021 Program). As of September 30, 2022 (FYE2022), V’s December 2021 Program had remaining authorized funds of $5.2B. All share repurchase programs authorized before the December 2021 Program have been completed.
In October 2022, V’s Board authorized a new $12B share repurchase program.
Valuation of Visa
When I wrote my December 2, 2021 guest post, V was trading at ~$203.75. Its valuation based on current adjusted earnings estimates was:
- FY2022 – 33 brokers – mean of $7.06 and low/high of $6.83 – $7.36. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~28.9 and ~27.7 if I use $7.36.
- FY2023 – 31 brokers – mean of $8.43 and low/high of $7.96 – $9.60. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~24 and ~21 if I use $9.60.
Only 8 brokers provided estimates for FY2024. With so few estimates, I disregarded them.
At the time of my April 27, 2022 post, V Shares were trading at ~$214. The valuation based on current adjusted earnings estimates was:
- FY2022 – 32 brokers – mean of $7.12 and low/high of $6.94 – $7.33. Using the mean estimate, the forward adjusted diluted PE is ~30 and ~29.2 if I use $7.33.
- FY2023 – 34 brokers – mean of $8.38 and low/high of $7.67 – $8.67. Using the mean estimate, the forward adjusted diluted PE is ~25.5 and ~24.7 if I use $8.67.
- FY2024 – 18 brokers – mean of $9.79 and low/high of $9.41 – $10.07. Using the mean estimate, the forward adjusted diluted PE is ~21.9 and ~21.3 if I use $10.07.
Shares now trade at ~$207. The valuation based on current adjusted earnings estimates is:
- FY2023 – 31 brokers – mean of $8.28 and low/high of $8.00 – $8.50. Using the mean estimate, the forward adjusted diluted PE is ~25 and ~24.4 if I use $8.50.
- FY2024 – 28 brokers – mean of $9.64 and low/high of $8.83 – $10.10. Using the mean estimate, the forward adjusted diluted PE is ~21.5 and ~20.5 if I use $10.10.
- FY2025 – 11 brokers – mean of $11.13 and low/high of $10.50 – $11.68. Using the mean estimate, the forward adjusted diluted PE is ~18.6 and ~17.7 if I use $11.68.
The disparity in the earnings estimates widens the further we go out on the calendar. Despite this disparity, the valuations reflected above are perhaps the lowest they have ever been since I became a shareholder which was within 1 month following the March 18, 2008 initial public offering (IPO).
Visa’s Attractive Valuation Makes It A Buy – Final Thoughts
Given the 2023 outlook shared recently by many senior executives, investors would be wise to dial back risk. In V, we have a company with a very low probability of defaulting on its obligations. This gives us a reasonable degree of comfort that we will not wake up one morning to learn that V is filing for bankruptcy protection.
In addition to the risk aspects of an investment, investors should pay particularly close attention to a company’s valuation based on forward-looking earnings estimates. The time to invest in a great company is when the investment community has low expectations (despite a company performing admirably) and valuation levels that give us a margin of safety.
I conclude that Visa is currently attractively valued thereby making it a ‘Buy’. If 2023 ends up being a ‘challenging’ year, however, V’s valuation could become even more attractive. If this does happen, I recommend you acquire more V shares.
Author Disclosure: I am long V. I disclose holdings held in the FFJ Portfolio and the dividend income generated from this holding. I do not disclose details of holdings held in various tax-advantaged accounts for confidentiality reasons.
Author Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
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I am a self-taught investor and run the Financial Freedom is a Journey blog. I have invested in the North American equities markets for over 34 years. I retired from a career in banking and continue to invest as this is something about which I am passionate.