Visa Stock: Buy It For the Long Term

The global payments industry is about to boom. The rise of financial technology has enabled a wave of new abilities in global payments, especially the peer-to-peer segment.
Visa (NYSE: V) stands at the top of the global payments industry. The company is reaping strong growth, with plenty of future growth potential left in the tank. In turn, Visa stock has performed extraordinarily well for an extended period.
Visa stock has returned 246% in the past five years. Visa stock has trounced the S&P 500 in that time, which might make investors hesitant to buy in such an uncertain market. But while Visa’s price tag may be off-putting, there is plenty of growth potential left to make it a rewarding stock pick over the long-term.

Visa’s Growth Profile

Visa operates in an oligopoly, meaning there are only a few players that dominate the global payments industry. This industry concentration leads to high margins. And, Visa has compelling growth potential.
Excluding restructuring charges and other one-time expenses, Visa’s earnings per share rose 8% in the recently concluded fiscal 2016. Revenue rose 9%, driven by growth in global payments and the benefits of the Visa Europe transaction. Visa benefited in the last fiscal year from strong growth in payments volumes.
Visa’s biggest growth catalysts are growth of data processing in the U.S., as well as growth in new markets. For example, data processing revenue increased 25% last quarter. In addition, international revenue growth was 36% last quarter, mostly attributable to the Visa Europe deal.
Last year, Visa acquired Visa Europe, its international counterpart, for $23 billion. This massive deal created an industry giant, which added over 500 million accounts to Visa’s portfolio. The deal instantly catapulted Visa’s global scale.
At the time of the acquisition, Visa estimated that 37% of personal consumption expenditure was still being done by cash and check in Europe. As a result, there is a huge opportunity in Europe. The move to non-physical financial transactions represents a compelling long-term growth story there for Visa.
For example, Visa’s cross-border growth was 149% last quarter, year over year.
Plus, Visa’s growth would have been even better if it were not for the strong U.S. dollar. As a global company, Visa’s revenue was reduced three percentage points because of unfavorable foreign exchange fluctuations.

Earnings Growth Potential Shines

As previously mentioned, Visa stock isn’t a screaming bargain. At 33 times earnings, it will rarely register on a value investor’s radar. With such a high P/E ratio, investors can’t depend on much room for multiple expansion going forward.
But Visa can still provide satisfactory returns through earnings growth alone. The company expects earnings per share to increase 30% in the upcoming fiscal 2017 year. Even if Visa stock experiences a flat valuation multiple, a 30% return potential is compelling. And, this does not include Visa’s dividend payments.
Speaking of dividends, while Visa’s 0.8% dividend yield may not be too appealing to income investors, Visa stock is more attractive to dividend growth investors. Those with a longer investing time horizon should view Visa much more favorably, because the company increases its dividend by double-digit rates each year.
Visa recently increased its dividend by 18%.
Visa expects 16% to 18% revenue growth this year. If earnings per share grow at a similar rate, Visa will have little trouble passing along another strong dividend hike next year.

Catalysts for Visa Stock

The Visa Europe deal added billions of new revenue for Visa, but there are still several catalysts set to fuel future growth. These include tokenization services, digital platforms and wearables, e-commerce, and peer-to-peer financial transactions. Visa will continue to get a piece of all these transactions.
Visa stock may have a tough time if the global economy enters recession. But in the current environment, there is still plenty of growth left up ahead.

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