VISA INC. $183 (New York symbol V; Conservative Growth Portfolio, Finance sector; Shares outstanding: 792.0 million; Market cap: $144.9 billion; Price-to-sales ratio: 10.9; Dividend yield: 0.7%; TSINetwork Rating: Above Average; www.visa.com) operates the world’s largest electronic payments network. The company processes credit, debit, prepaid and commercial payments under the Visa, Visa Electron, Interlink and PLUS brands.
Visa gets most of its revenue from fees it charges card issuers and merchants for using its network. These fees are based on payment volume, transactions processed and other factors. The responsibility for evaluating customer creditworthiness and collecting payments lies with the banks that issue the cards, not with Visa.
Cashless transactions fuel big gains
The company continues to benefit as more people pay for purchases with credit and debit cards instead of cash or cheques. Its revenue rose 66.4%, from $6.3 billion in 2008 to $10.4 billion in 2012 (fiscal years end September 30).
Earnings jumped 147.2%, from $1.7 billion in 2008 to $4.2 billion in 2012. Earnings per share rose at a faster rate of 175.6%, from $2.25 to $6.20, on fewer shares outstanding. However, the U.S. government has passed new rules that limit fees credit card firms can charge merchants to access their networks. This will cut Visa’s 2013 earnings by $0.15 a share.
Visa and other credit card firms recently agreed to pay a total of $7.25 billion to settle a class-action lawsuit that accused them of fixing the fees that U.S. retailers pay to process cards. Visa has already set aside $4.4 billion to cover its share of the deal. However, several major retailers have rejected the settlement. If 25% of these merchants opt out, Visa and the other credit card issuers can cancel the agreement. A judge will make a final ruling in September 2013.
Going mobile in emerging markets
Strong growth from Visa’s overseas operations (which supply 45% of its revenue) should help offset any drop in its U.S. fee income. Card use in developing regions like Latin America and the Middle East continues to expand. As well, the company has formed alliances with wireless carriers in countries like India that make it easier for people without a regular bank account to use their cellphones to buy goods and pay bills.
Visa is also using its steady cash flow to buy back its stock: it recently spent $3.1 billion on buybacks and expects to repurchase a further $1.0 billion of shares by January 2014. Buybacks raise earnings per share and other per-share calculations and give the remaining shareholders a larger stake in the firm.
As well, dividends account for less than 10% of Visa’s cash flow, so it has plenty of room to raise its annual payout of $1.32, which yields just 0.7%.
High p/e reflects strong outlook
The stock has soared 140.8% since we first recommended it at $76 in our December 2010 issue. It now trades at 24.5 times the $7.48 a share that Visa will probably earn in fiscal 2013. That’s still a reasonable p/e ratio in light of the company’s well-known brand and strong international growth prospects.
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