When a company increases its dividend, it usually means that the board and the management team are convinced that the future of the company is bright. This is especially true when the dividend is increased by a double digit percentage, which happened last month with Visait is (V -0.09%) 20% increase in its quarterly dividend per share to $0.45.
Management is clearly optimistic about the company’s prospects. why is this the case? And is the stock a buy for dividend growth investors? Let’s take a closer look at Visa’s fundamentals and valuation and try to answer these questions.
Revenues and profits continue to rise
With nearly 4.1 billion debit and credit cards in circulation as of June 30, Visa is the world’s largest publicly traded payment processor. Putting this into context, the next largest exchange-traded peer, MasterCard, had just under 2.6 billion cards in circulation as of June 30. And yet, investors seem to be pricing Mastercard shares a bit higher right now. Visa trades at a forward price-to-earnings (P/E) ratio of 25.6, lower than Mastercard’s forward P/E ratio of 28.4.
Visa’s net revenue increased 18.7% year over year to $7.8 billion in the fourth quarter (which ended September 30). The company’s net revenue growth was driven by double-digit percentage increases in its payments volume, total cross-border volume and transactions processed.
Although inflation remains high in many markets around the world, consumers were undeterred. Visa’s currency-neutral payments volume increased 10.5% year-over-year to $2.9 trillion in the quarter.
Total cross-border volume increased 36% year over year for the quarter. Given that most countries’ borders were open for the duration of the quarter, this rebound in cross-border volume comes as no surprise. And taking into account intra-Europe and the negative impact of the discontinued Russian business, cross-border volume growth was even higher – an incredible 49% in the fourth quarter.
Due to flat consumer spending and a rebound in cross-border travel, Visa-processed transactions grew 12.3% year-over-year to 50.9 billion in the quarter.
Visa recorded $1.93 of non-GAAP (adjusted) diluted earnings per share (EPS) for the fourth quarter. This is a staggering 19.1% year-over-year growth rate. Visa’s operating expenses increased 20.3% in the quarter. This explains how the non-GAAP net margin fell 115 basis points to 52.5% in the quarter. This was offset by a 2.7% reduction in the company’s diluted number of shares outstanding to 2.1 billion shares, which explains how Adjusted Diluted EPS growth outpaced revenue growth. net business.
While analysts expect Visa’s diluted diluted EPS adjusted annual growth of 16.8% over the next five years, the company’s growth outlook remains strong. Indeed, the move away from cash and alternative payment methods is set to continue in the years to come.
The dividend is well covered
When compared to S&P500 the index’s 1.6% dividend yield, Visa’s 0.9% yield won’t impress any income investor. But Visa has a few strengths that I think make up for its low dividend yield. First, the yield fell slightly due to the strong appreciation in stock prices over the past decade. The stock is up 491% over that time (vs. the S&P 500’s 190% gain).
The company’s dividend payout ratio is expected to reach just under 22% for its 2023 fiscal year ending next September. This provides Visa with more than enough capital to grow its payment network, reduce debt and buy back stock when the time is right. And due to the low dividend payout ratio, Visa can further increase the payout ratio with dividend increases faster than the rate of earnings growth.
A wonderful company at a decent valuation
Visa is a blue chip company with great growth potential. And yet, the stock appears to be trading at a favorable valuation.
Visa’s trailing 12-month price-to-free cash flow ratio of 25.4 is significantly lower than its 10-year median for this metric of 30.2. With the company’s growth profile looking intact over the long term, this makes Visa an intriguing buy for dividend growth investors.
Kody Kester holds positions at Mastercard and Visa. The Motley Fool fills positions and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.