The Sky’s the Limit for Visa in a Digital World

Visa (NYSE:V) stock is rebounding and looks set to move north of $200 once again. I believe the stock was an unfortunate casualty of market reactions to the novel coronavirus pandemic.

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As the dust begins to settle and things normalize, the broader markets are gaining ground once again, and Visa is no different.

It helps that the world’s largest payments network also provided an excellent second-quarter earnings report. Revenues moved in the right direction, and bottom-line growth is also impressive.

Moreover, Visa offers products and services that are in greater use today due to the nature of Covid-19. Add to that its strong share repurchase program and dividends, and you have all the makings of a great stock.

It’s undoubtedly true that Zoom (NASDAQ:ZM) and Amazon (NASDAQ:AMZN) gained tremendous ground as their services become “essential” in our current climate. However, Visa is also a steady performer that also has a lot to offer in terms of profitability. That’s why it’s a good addition to any portfolio.

Operating Metrics Look Healthy

Visa reported revenues of $5.85 billion in the second quarter, beating analyst estimates by $101 million. That’s very impressive, considering a large part of the quarter was affected by Covid-19. Figures were up year over year, and there’s a pattern of robust top-line growth that should keep investors happy.

We already saw a healthy increase in digital transactions before the crisis, but they’ve hit a blip due to the pandemic. Due to stay-at-home orders, transactions plunged as people spent less at restaurants, gas stations and entertainment venues.

Visa acknowledged that spending fell in March, and cross-border travel-related expenditure is also on the decline due to the pandemic. In such an environment, it’s impressive that the company has maintained such a strong track record of revenue growth.

Although transaction volume is down, it is bound to return to normal levels soon. More importantly, the current crisis will also lead to people conducting transactions online. It will likely be the start of a comprehensive shift to digital transactions for the world – a massive gain for Visa.

That’s why revenue estimates remain bullish for the company. A slowdown will occur in the third quarter, but then it should be full steam ahead. The figures are also impressive if you compare them to other companies in the industry, such as Mastercard (NYSE:MA), and PayPal (NASDAQ:PYPL).

Source: Chart by Faizan Farooque, data from S&P Global Market Intelligence

Share Buybacks Helped V Stock Immensely

By the end of the fiscal year 2019, Visa repurchased 20% of its stock over the past five years. In 2019 alone, the company spent a combined $10.9 billion on share repurchases and dividend payouts. That’s a staggering sum, but Visa isn’t done yet. In January, the company’s board authorized a share repurchase program to buy back $9.5 billion of Class A common stock.

In the recently concluded quarter, share repurchases totaled $3.2 billion. That’s quite an aggressive number, especially when a company has a pandemic to contend with. However, it underlines a key fact. As soon as the pandemic is firmly in our rearview mirror, expect buybacks to comeback in full swing.

Dividends Are Solid

Visa has maintained a steady dividend policy ever since it had its IPO in 2008. Starting with a dividend of just 2.63 cents per share, the company now pays out 30 cents per share. The dividend was reaffirmed as part of the company’s recent quarterly results. Its strong dividend policy is reflected in the company’s payout ratio.

Visa Is Showing Excellent Cost Control

Just like revenue, the company’s bottom line has been expanding at a healthy clip over the last five years. Covid-19 will slow down growth; however, looking at the larger picture, profits will only rise with each successive year. In the recent quarter, earnings per share was $1.39, a 9% rise over the previous figure of $1.28. The share repurchases and revenue beats certainly helped over there.

Operational expenses also grew by just 4%, while revenues grew by 6%. Cost control has been an important theme for the company for several years. It’s heartening that the numbers show Visa is serious in this department.

V Stock Valuation

Visa shares are expensive; there’s no escaping it. On a trailing 12-month basis, V stock trades at a price-earnings ratio of 35.43, while the sector trades at 34.25. Investors highly covet the fintech space, and that’s why you are bound to have high valuations. Considering this, when you compare the company with competitors, it’s not exceptionally expensive. But as an analyst, it’s plain to see that investor expectations are priced in now.

Source: Chart by Faizan Farooque, data from S&P Global Market Intelligence

The Bottom Line on V Stock

I am very bullish on Visa. The company maintained its operational performance amidst the pandemic and looks set for many great years ahead. Unfortunately, businesses around the world are grappling with weak consumer spending and recessionary pressure. Once we have a clearer picture regarding when a vaccine for Covid-19 will be commercially available, demand and volume growth will increase exponentially.

Even though shares are expensive, Visa is a company that’s set its sights on the future. As the world moves towards electronic payments, the importance of Visa stock will continue to rise, and so will its valuation.

V stock is a buy for me.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.


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