Visa (V, Financial) is the world’s leading payments processor. Despite its size and scale the company has continued to grow its revenues in the 4%-plus range for the last five years and looks good to repeat the feat well into the next decade.
It might sound counterintuitive to recommend a company that is yielding 0.68% as a great dividend investment, but that’s exactly why you need to consider this company to be part of any dividend portfolio. The company pays out a lot less in dividends because there is so much more it can grow that the money is better off being reinvested into the company providing us a great return on the stock price, all the while transforming itself into a dividend-paying machine 10 years from now.
The moat, the competitive landscape and Visa’s future positioning
Visa and MasterCard (MA, Financial) handled more than 80% of card transactions that were processed last year. Together these companies control our financial transaction world. They are bigger than any other player right now, and the one company that could have challenged them in the future – PayPal (PYPL, Financial)Â – was forced to accept Visa/MasterCard’s control over the market due to increasing competition from mobile wallets in the digital payments market.
The odds of a new company jumping out and disrupting the payments world are miniscule. But even if the unlikely happens, Visa and MasterCard will still be able to find a way to work with the company rather than have their businesses disrupted by it. They have done it before and they will do it again. The sheer numbers behind them and the reach of the companies makes it practically impossible for a new player to keep them out of the loop. This is as good a moat as you will ever see in any industry.
Margins, cash flow and capital expenditure
Visa’s operating margin in 2015 was more than 60%. I cannot think of any other company that makes more than $10 billion a year that can boast such high margins except, possibly, Alibaba Group (BABA, Financial). As the company grew bigger the margins have actually expanded. The reach, size and scale have already started to pay off for the company. Margins are a good indicator of the control the company has over the market because tight margins mean competitive pressure, and that’s not happening with Visa.
But the real icing on the cake is that the company hardly spends on capital expenditure. In 2015 Visa’s sales totaled $13.88 billion with an operating income of $9.06 billion. The company spent a mere $414 million on capital expenses during that year. In the last five years Visa spent $2.167 billion in capex while recording sales of $57.97 billion. Such is the nature of its business that the company has a low requirement for capex to keep its sales board ticking. Despite the technological complexity involved its business is simple and makes money by helping people carry out their transactions. It essentially does the same thing over and over, which is why it has such low capex needs.
Balance sheet, cash, debt
At the end of third quarter the company had $5.88 billion cash on hand with a long-term debt of $15.87 billion. With third quarter operating revenue hitting $3.63 billion, the balance sheet is quite strong.
Free cash flow has grown from a mere $435 million in 2006 to $6.17 billion in 2015, and it continues to grow. Last year Visa’s operating cash flow was $6.584 billion, and the company paid $1.177 million in dividends. Dividend growth for the last five years is approximately 30%, and there is plenty of room for Visa to keep expanding on this front.
One of the crucial factors investors miss when it comes to selecting big companies to add to their dividend portfolios is the company's ability to keep improving sales in the next 10 to 20 years.
People tend to look at dividend history and yield to make their decisions, but it can come back to hurt you. If the company is not able to increase its sales then no matter what its past history is dividends are going to slow down at some point, dragging the stock down along with it.
On the other hand, a low-yielding company with great prospects for sales growth will be in a much better position to keep delivering the dividend growth that you need over the next decade.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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