Is This Dominant Fintech Stock A Buy?

by James · August 22, 2022

Growing concerns about the state of the US economy have weighed on S&P 500 index in 2022. Even with the rise in recent weeks, the index is still down 12.5% so far this year.

The inventory of payment processing Visa (W -1.11%) has held up much better than the broader market — down just 3%. But should growth investors buy the shares for their portfolios? Let’s dive into Visa’s fundamentals and valuation to get answers.

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Another great quarter

Last month, Visa published its financial results for the third quarter ended June 30. And not surprisingly, the company’s results were robust. Visa reported $7.3 billion in net revenue in the third quarter, which was up 18.7% over the same period last year.

What was behind the payment processor’s admirable net income growth for the quarter? The answer lies within Visa’s over-the-line, double-digit growth in all three main areas: Payment volume, total cross-border volume and processed transactions.

Payment volume is the dollar amount of transactions processed by the company’s network. Visa reported $2.9 trillion in payment volume in the third quarter, which was up 8% year over year. Adjusted for unfavorable currency translation due to the strong dollar, Visa’s payment volume increased by 12.3% compared to the same period last year.

The company’s solid payment volume growth was a result of reopening borders. More international travel leads to higher consumption, which benefits Visa. This explains how Visa’s cross-border volume was 40% higher year-on-year. Cross-border volume refers to transactions where the country of issue is different from the country of trade. The increase in cross-border travel also contributed to driving processed transactions 16% higher compared to the previous year.

Visa recorded $1.98 in non-GAAP (adjusted) diluted earnings per share (EPS) in the third quarter, which was 32.9% year-over-year growth. What was the reason for this staggering growth rate?

In addition to its larger net revenue base, Visa’s non-GAAP net margin rose 470 basis points over the same period last year to 57.8% during the quarter. Combined with a 2.5% reduction in the company’s weighted average shares to 2.1 billion, this is how adjusted diluted EPS growth nearly doubled net income growth in the quarter.

As cash continues to be displaced, Visa’s alternative payment methods will flourish. That’s why analysts believe the company’s adjusted diluted EPS will grow 18.2% annually over the next five years.

Image source: Getty Images.

The enormous dividend growth is set to continue

Visa’s dividend yield of 0.7% is well below the S&P 500 index’s 1.5% yield. But the biggest reason the return is so low compared to the broader market is that the stock has produced a 21.5% annualized return over the past 10 years. As quickly as the company’s dividend has grown, so has its share price.

Visa’s dividend should be able to continue to grow at a high-teens percentage rate each year for the foreseeable future. That’s because the dividend payout ratio will come in at around 21% for this financial year. This is the reason why the dividend should be able to grow at least as fast as earnings in the years ahead.

The appreciation is not excessive

Visa is a thriving business. And the stock appears to remain a bargain for growth investors with a five-year-plus time horizon.

This is supported by the fact that Visa’s 0.7% dividend yield is above the 10-year median yield of 0.6%. With the COVID-19 pandemic further accelerating the shift away from cash, the company’s fundamentals appear as promising as ever. That is why there is reason to believe that the stock should trade closer to a dividend yield of 0.6%. Moderate value expansion is the cherry on top of Visa’s high growth potential, which is what makes it a compelling buy for growth investors.