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Why Visa Stock is Underperforming the Market, But Still a Strong Buy Moving Forward

Updated: Jan 15


Visa Card


Visa Inc. is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. Visa provides one of the world's most advanced digital payment solutions with transaction processing speed at near instantaneous levels for customers around the globe; VisaNet handles about 150 million transactions daily.


Visa stock has been a laggard in the market as of late. In Q3 2020, Visa stock underperformed the S&P 500 by over 12%. This was largely due to an earnings miss for Visa's fiscal year 2020 and higher-than expected costs related to its acquisition of Visa Europe. However, it is important to note that both these issues have been resolved and analysts are now bullish on what lies ahead for this company. The question becomes: should you buy shares now?


Table of Contents

P/E Ratio

Revenue

Free Cash Flow

Profit Margin

Costco Dividend Yield & Dividend Yield on Cost

Dividend Payout Ratio

Conclusion


Visa P/E Ratio

Visa's historical P/E hovers around 30x - 45x. Its' current P/E ratio sits around 45.01x which is aligned closely to historical values. Visa's P/E has decreased in 2021 due to the stock price dropping through the last half of the year and its overall stagnant price throughout 2021.

Visa is currently trading at a P/E ratio that is lower than the market average. This means that Visa may be a good investment because it gives investors more upside than downside.

Visa P/E Ratio History

Revenue

Visa's revenue has recently returned to be on trend with is revenue growth prior to the COVID-19 impact in Q1 and Q2 2020. In fact, Visa's TTM Revenue CAGR is 28.58% and I expect that to continue due to the Holidays. This will allow Visa to continue the growth of their dividend into the future.

Visa Revenue

This increase is due to higher operating margin rates across all regions as well as lower tax expenses because of domestic production deductions under U.S Tax Reform Act (U.S.). The strong growth in Visa's operating margin rate across all regions was primarily due to higher service and royalty fees, partially offset by an increase in general and administrative expenses. This strong performance enabled Visa to deliver a dividend yield of 0.61% on June 20th, 2021, which is the highest it has been since 2015 when its' yield was at 0.72%

Visa Revenue CAGR

Visa Free Cash Flow

Visa's Free-Cash-Flow or FCF is at an all-time high. Visa reported free cash flows around $14.5 billion in September 2021, up from $9.3 billion in December 2020. This is a 36% increase in nine months with more expected in Q4 2021. Visa's TTM FCF CAGR is even higher at 49.65% which is quite impressive considering the stock price.

Visa Free Cash Flow


Visa Profit Margin

Visa has kept their profit margins around 45% with them reporting 51% in September 2021. These are healthy profit margins and are higher than other competitors like MasterCard, Square, and American Express. Its closest competitor, $MA, has a profit margin around 45%. Coupled with increased holiday spending and increased vendor fees I expect Visa to continue leading the pack into the future.

Comparison of Profit Margin between $V, $MA, $SQ, and $AXP

Visa Dividend Yield & Dividend Yield on Cost

Visa's dividend yield, as of 27 December 2021, sits at .61% which is higher than its average over the past five years. This is due the price dropping in 2021. The difference in dividend yield compared to historical averages doesn't warrant jumping in based on the yield alone.

For the past four years, Visa's dividend yield has been around 0.60%. Visa is confident that it can pay out its current annual dividend due to its excellent access to new opportunities in both the United States and China. VISA's current annual dividend is $0.38 per share of Visa common stock per quarter. This amounts to a yearly dividend of $1.58 for every share of Visa stock owned by an individual investor. Is the dividend worth the sideways action we've seen with Visa? 2021 YTD Visa has returned -0.6% which is significant underperformance when compared to the overall market. If you include reinvested dividends their TTM Total return has been a measly 2.98%. I expect the price to climb throughout 2022 to increase returns.

Visa Dividend Yield

Visa's Yield on Cost has been increasing over the last ten years. Visa's YOC after 10Ys sits around 5.21% which is decent for income investors. Additionally, Visa's Dividend per Share CAGR sits around 17%, meaning that Visa increases their dividends on average by 17% per year. These are great numbers for dividend growth investors as well.

Costco Yield on Cost
Visa Dividend CAGR

Dividend Payout Ratio

Lastly, Visa's dividend payout ratio sits around 22.23% with an average around 20%. This is significantly lower than most dividend companies including some long-standing dividend aristocrats. Visa is only paying around 22% of its earnings out as dividends meaning they have money available to continue funding further expansion in the future.

Visa Dividend Payout Ratio

Conclusion

Visa has been hit hard in 2021. I was concerned with Visa as it is my second worst performing position of 2021. I believe Visa's stock price is on the road to recovery during 2022. It hit a low around the first of December at $189.91. I expect their earnings to continue to increase and the share price to follow when we receive Visa's Q4 2022 financial statements. Expect resistance around the 200 day moving average at $225-$228.


In my opinion Visa is a BUY at current value. Its' dividend might be small but it will increase quickly as long as the maintain their CAGR. Additionally, I expect price appreciation throughout 2022.

Visa Candlestick Chart

Looking to start your dividend journey, check out my Ultimate Dividend Investing Guide, HERE


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Happy Investing!


10% of all donations go to the Navy and Marine Corps Relief Society to help out Sailors and Marines in financial need.

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