If people aren’t spending money, then it’s a lot harder for credit card companies like Visa (NYSE:V) to make a profit. And that’s the conundrum facing V stock these days.
The novel coronavirus’ impact on the U.S. and global economy has been horrific, with the International Monetary Fund warning of the worst global downturn since the Great Depression. It calls it the “Great Lockdown.”
President Donald Trump is eager to have states lift some restrictions as soon as possible. But health experts continue to caution that Americans should continue social distancing efforts so areas of the country that currently have reduced cases don’t see a new flare-up.
All this, of course, is difficult for payment processing companies that rely on a regular stream of credit card activity to churn a profit for investors.
Visa is the dominant brand in the space, and despite the recent headwinds is still a quality stock for investors today. Here’s a closer look at V stock.
Taking a Glance at V Stock
Visa stock is down more than 11% so far in 2020, but that’s an encouraging improvement from where we were just a month ago, when V was down more than 27%.
It is outperforming both the Dow Jones Industrial Average, which is down 17.6%, and competitor, Mastercard (NYSE:MA), which is down almost 14%.
Two other competitors are faring much worse — American Express (NYSE:AXP), is down 32.3% YTD, while Discover Financial Services (NYSE:DFS) is down a whopping 61.1%.
Earnings for V stock are expected on April 22. Analysts are expecting to see the beginnings of the economic slowdown impacting Visa’s quarterly revenue and earnings-per-share growth. EPS is expected to be $1.36, versus $1.31 for the same quarter a year ago.
Short-Term Prospects for Visa
Earnings season began for major banks, and the early results are not good for V stock. Indications that banks are preparing for a huge increase in loan defaults, with JPMorgan (NYSE:JPM) setting aside $8.3 billion in the first quarter for loan losses — that’s $6.8 billion more than last year’s first quarter.
March retail sales numbers also raise a red flag. Economists had predicted a horrific 8% drop due to the coronavirus pandemic, but even that pessimistic forecast wasn’t dire enough — the final number was an 8.7% drop, which is the biggest fall in retail sales in 28 years.
So it won’t be surprising at all if Visa takes a beating in the next couple of weeks. Stimulus checks from the federal government started going out this week, but that money will be used for food staples, rent and mortgages, rather than any discretionary spending.
Don’t panic, though, because I’m confident things will get better for V stock.
Long-Term Prospects for Visa
For investors who are looking to take a position in V stock while it’s at a discount, there’s plenty to appreciate.
It’s fundamentally sound. Visa is an exceptionally strong company that is able to weather a downturn. With a market cap of $367 billion and its profit margin is an extraordinary 52.6% — a much better margin than Mastercard, American Express or Discover.
It’s innovative. Visa doesn’t rest on its laurels — it looks to expand into new opportunities. You can use a Visa card now to buy marijuana, or you can use your Visa rewards program to buy bitcoin.
“There’s still so much room to grow in consumer payments. You’ll see clearly today that there’re still many consumers to reach, and there are still enormous opportunity to move consumers to electronic and digital payments,” Visa CEO Al Kelly said at the company’s annual investor day event.
Visa is aggressive with fintech. Earlier this year, Visa announced it was purchasing the fintech company Plaid for $5.3 billion. Plaid lets its users share financial information and connect their bank accounts with apps and services such as Acorns, Betterment, Chime, Transferwise and Venmo. As roughly 75% of global internet-connected consumers use a fintech service to transfer money, it’s incredibly smart for V to get in on that business.
Visa offers a consistent dividend. The yield is nothing to write home about — 0.7% for an annual payout of $1.20 per share. But don’t ignore the fact that V stock offers a decent payout ratio of 21.9% with its dividend, or that the payout increased for 11 consecutive years.
The Bottom Line for V Stock
Visa is a dominant player in the payment processing space and an essential company for how people spend and transfer their money.
While the company is facing a difficult second quarter and bank earnings may weigh it down further, V stock can be had for a discount and it remains a solid choice for investors today.
Visa has an ‘A’ quantitative grade in my Portfolio Grader tool, and gets a ‘B’ rating overall. And because it’s also a good dividend stock, it gets a ‘B’ grade in my Dividend Grader as well.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
