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I have been a Visa (V) shareholder almost from the day it went public on March 18, 2008. Over the years I have also increased my exposure. My most recent purchase was made in early March 2022 at which time I acquired shares at ~$195. The number of shares acquired was not meaningful so I did not disclose this purchase when I published my FFJ Portfolio – February 2022 Report.
Although I only disclose 225 V shares held in a 'Core' account in the FFJ Portfolio, V is my largest holding; most shares are held in a retirement account for which I do not disclose details (see January 7, 2022 Investment Holdings Review).
My most recent V reviews can be found in my October 30, 2021 post and in my December 2, 2021 guest post at Dividend Power. With the release of Q2 2022 results following the April 26, 2022 market close, however, I once again revisit V.
Recent Events
The following are updates on recent events I flagged in my prior two posts.
US Justice Department Probe
The U.S. Justice Department is probing V's relationships with large fintech companies as part of its antitrust investigation of the card giant. Antitrust investigators are looking into the financial incentives that V gave Square Inc., Stripe Inc., and Paypal Holdings Inc.
V has declined to comment on this matter. In March 2021, however, it indicated the US Justice Department was looking at its debit practices to determine whether V uses anti-competitive practices in the debit-card market.
The US Justice Department previously investigated the credit card payments industry. In 2010, Visa and Mastercard (MA) settled with the US Justice Department when they agreed to allow merchants to offer consumers incentives to use a low-cost credit card.
This probe is ongoing.
Amazon (AMZN) vs Visa
AMZN indicated it will stop accepting V credit cards issued in the UK starting January 19, 2022; AMZN accounts for less than 1% of V’s UK credit card volume.
In January 2022, AMZN dropped plans to stop accepting Visa credit cards in Britain, two days before the change was expected to take place. Both companies stated they would continue talks on a broader resolution to their disagreement.
In February, both parties reached a resolution to settle the dispute over V's credit card fees. The resolution means AMZN customers in the UK can continue using V credit cards. In addition, AMZN will also drop the 0.5% surcharge on V credit card transactions it introduced in 2021 in Singapore and Australia.
As part of this resolution, V and AMZN will collaborate on 'new product and technology initiatives to ensure innovative payment experiences for our customers in the future.'
Buy Now, Pay Later (BNPL)
On October 27, 2021, V announced a growing list of issuers, acquirers and fintechs that are leveraging Visa’s technology to bring BNPL options to their customers.
V intends to release capabilities on Visa Developer to allow clients to develop and pilot installment experiences to offer to their customers. Until such time, a high-level overview of the BNPL initiative is found here.
Acquisitions
Acquisitions add to V's capabilities and make sense where V's management determines it is faster or cheaper to buy than to build. In some cases, V's acquisitions expand the scope of an existing service.
On the Q2 earnings call, management indicates that to the extent the correction witnessed in public markets carries over to private markets, it is likely V could become more active on the acquisition front. V, however, has no specific annual objectives in terms of the acquisitions. Rather, acquisitions are based on what makes sense and where value can be created.
Tink
On June 24, 2021, V announced it has signed a definitive agreement to acquire Swedish fintech Tink months after it ditched a planned acquisition of Tink's U.S. rival Plaid; Visa terminated a planned $5.3B deal with U.S. data-sharing platform Plaid in January 2021 following a U.S. government lawsuit aimed at blocking the deal on antitrust grounds.
Tink is a European open banking platform that enables financial institutions, fintechs and merchants to build tailored financial management tools, products and services for European consumers and businesses based on their financial data.
Terms are 1.8B euro (~$2.2B) inclusive of cash and retention incentives.
V announced the closing of this acquisition on March 10, 2022.
Currencycloud
On July 22, 2021, V announced its intent to acquire British cross-border payments provider Currencycloud at a valuation of 700 million pounds (~$0.962B).
Launched in 2012, Currencycloud facilitates cross-border payments for nearly 500 banking and technology companies, including well-known European fintechs Klarna, Monzo, Starling and Revolut. Since its launch, it has moved more than $75B in payments to over 180 countries.
Visa has been a Currencycloud shareholder since 2020; the financial consideration will be reduced by the equity that V already owns in the startup.
V announced the closing of this acquisition on December 20, 2021.
Financial Results
A comprehensive overview of V is found within its 2021 Annual Report and Form 10-K.
Q2 and YTD2022 Results
Please refer to the Q2 information released on April 26, 2022.
Despite Omicron, Russia and Ukraine, V's reported strong Q2 results with net revenues up 25% and GAAP EPS up 23%; non-GAAP EPS was up 30%.
Global payments volume growth has remained strong and stable relative to pre-COVID levels.
Omicron's impact on most US volumes was short-lived. The robust cross-border travel recovery that started in the Fall of 2021 as borders reopened, resumed in February as Omicron's impact faded.
In the first 2 weeks of March, there was a spike in cross-border volumes from Russia and Ukraine. After V suspended operations in Russia in mid-March, there were no more cross-border transactions in or out of Russia. So far, V is not seeing any material impact on cross-border travel in other corridors as a result of Russia's invasion of Ukraine.
V's Q2 results reflect the best estimates for the impact of suspending operations in Russia. This includes revenues and expenses from terminating all client and supplier contracts, resolution of settlement balances and the deconsolidation of the Russian business.
Russia, accounting for 17% of transactions of VISA Direct volumes, was V's second-largest market. This is a setback but the Visa Direct business is ramping quickly in other international markets, in cross-border remittances and various business-to-consumer payments.
Free Cash Flow (FCF)
V's FY2011 - FY2021 annual FCF (in billions) is ~$3.52, ~$4.63, ~$2.55, ~$6.65, ~$6.17, ~$5.05, ~$8.61, ~$12.22, ~$12.03, ~$9.70, and ~$14.52B. In the first half of FY2022, V has already generated ~$7.3B in FCF. If history is any indication, at least ~$14B in FCF in FY2022 is not an unreasonable expectation.
FY2022 Outlook
In the first 3 weeks of April, on a year-over-year (YoY) basis, US payments volume was up 12%, with debit up 2% and credit up 26%. Debit volumes are lapping the impact of stimulus payments in 2021.
US April spend growth versus 3 years ago was up 45%, with debit up 54% and credit up 37%. These trends are relatively consistent with performance in major markets around the world. The exception is Central Europe, the Middle East and Africa (CEMEA) where V now has no payments volume from Russia. Processed transactions grew 17% YoY, up 36% versus 2019. Constant dollar cross-border volume, excluding transactions within Europe, grew 47% YoY and was 15% over 2019. Card-not-present nontravel growth was 62% about 2019.
The suspension of business in Russia will reduce second-half revenues by about 4%. Russia will also negatively impact the payments volume and cross-border volume.
High inflation, supply chain disruptions, rising interest rates and the invasion of Ukraine have created uncertainty. There is, however, no evident impact on V's global payments volumes.
Domestic and cross-border E-commerce spend is strong and stable relative to 2019 and well above the pre-COVID trend line.
V expects processed transactions to grow relative to 2019. Any variability will be largely driven by the extent to which small ticket card-present everyday spend returns.
V's FY2022 outlook assumes:
- YoY growth rates will moderate as it laps the strong second half FY2021 recovery;
- excluding Russia and Ukraine, V assumes no spillover effects on other corridors in its cross-border business.
Expectations are that cross-border travel, excluding intra-Europe, will fully recover to 2019 levels by the end of FY2022 despite the loss of V's Russian business.
Q3 net revenues are expected to grow at the upper end of the mid-teens range in constant dollars. This includes a moderate contribution from the Tink and Currencycloud acquisitions.
In July, V will provide its Q4 and FY2022 outlook. Based on YTD results and the current FY2022 outlook, however, V expects FY2022 net revenue growth in constant dollars in the high teens to 20% range.
Credit Ratings
V's current unsecured domestic long-term debt credit ratings and outlook are:
- Moody's: Aa3 (stable)
- S&P Global: AA- (stable)
These ratings are the lowest tier of the high-grade investment-grade category and define V as having a VERY STRONG capacity to meet its financial commitments. The ratings differ from the highest-rated obligors only to a small degree.
These ratings are acceptable for my conservative investor profile.
Dividend and Dividend Yield
V's dividend history is accessible here.
On April 22, 2022, V's Board declared a quarterly cash dividend of $0.375/share payable on June 1, 2022 to all holders of record as of May 13, 2022. With shares trading at ~$214, the dividend yield is ~0.7%. This yield is what investors can typically expect from V.
In the first 2 quarters of FY2022, V distributed $1.611B in dividends versus $1.404B in the first 2 quarters of FY2021.
During the 3 months ended March 31, 2022, V repurchased 13.8 million shares of class A common stock at an average price of $210.19 per share for $2.9B. In the six months ended March 31, 2022, V repurchased a total of 33.3 million shares of class A common stock, at an average price of $210.11 per share, using $7.0B of cash on hand.
V has $9.7B of remaining authorized funds for share repurchase as of March 31, 2022.
Valuation
At the time of my early September 2021 post, V’s share price was ~$226.V's valuation based on FY2021 – FY2023 guidance from the brokers which cover V was:
- FY2021 – 32 brokers – mean of $5.82 and low/high of $5.69 – $5.93. Using the mean estimate, the forward adjusted diluted PE is ~38.8 and ~38.3 if I use $5.90.
- FY2022 – 35 brokers – mean of $7.26 and low/high of $6.85 – $7.83. Using the mean estimate, the forward adjusted diluted PE is ~31 and ~29.3 if I use $7.70.
- FY2023 – 24 brokers – mean of $8.60 and low/high of $8.01 – $9.60. Using the mean estimate, the forward adjusted diluted PE is ~26.3 and ~24.3 if I use $9.30.
Following the release of Q4 and FY2021 results, I wrote another post on October 30. Shares were trading at ~$212 and V had just reported FY2021 GAAP EPS of $5.63 for the publicly traded Class A common stock thus resulting in a diluted PE of ~37.7.
By way of comparison, V’s FY2011 – FY2020 diluted PE levels were 28.44, 42.11, 29.34, 30.42, 30.06, 31.46, 40.72, 29.85, 35.32, and 44.73.
On an adjusted diluted EPS basis, V generated FY2021 adjusted diluted EPS of $5.91 thus giving us an adjusted diluted PE of ~36.
At the time of my October 30 post, the brokers which cover V were likely still in the process of adjusting their adjusted diluted earnings estimates. Using current available estimates, however, V's valuation was:
- FY2022 – 34 brokers – mean of $7.09 and low/high of $6.83 – $7.45. Using the current ~$212 share price and the mean estimate, the forward adjusted diluted PE is ~30 and ~29 if I use $7.45.
- FY2023 – 30 brokers – mean of $8.45 and low/high of $7.96 – $9.60. Using the current ~$212 share price and the mean estimate, the forward adjusted diluted PE is ~25 and ~22 if I use $7.45.
When I wrote my December 2, 2021 guest post, V was trading at ~$203.75. Its valuation based on current adjusted earnings estimates was:
- FY2022 – 33 brokers – mean of $7.06 and low/high of $6.83 – $7.36. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~28.9 and ~27.7 if I use $7.36.
- FY2023 – 31 brokers – mean of $8.43 and low/high of $7.96 – $9.60. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~24 and ~21 if I use $9.60.
Only 8 brokers provided estimates for FY2024. With so few estimates, I disregarded them.
Shares currently trade at ~$214. The valuation based on current adjusted earnings estimates is:
- FY2022 – 32 brokers – mean of $7.12 and low/high of $6.94 - $7.33. Using the mean estimate, the forward adjusted diluted PE is ~30 and ~29.2 if I use $7.33.
- FY2023 – 34 brokers – mean of $8.38 and low/high of $7.67 - $8.67. Using the mean estimate, the forward adjusted diluted PE is ~25.5 and ~24.7 if I use $8.67.
- FY2024 – 18 brokers – mean of $9.79 and low/high of $9.41 - $10.07. Using the mean estimate, the forward adjusted diluted PE is ~21.9 and ~21.3 if I use $10.07.
I envision these estimates will be revised over the coming days but do not anticipate any major changes.
In the first half of FY2022, V has generated $3.54 of diluted EPS. If V generates $7.10 - $7.20 in FY2022 GAAP diluted EPS, its valuation is ~30.5 using the $7.15 mid-point.
Final Thoughts
As V enters the post-COVID era, management remains confident it can sustain a rate of growth at about pre-COVID levels for the following reasons:
- an acceleration away from cash and check for merchant payments as digitization becomes pervasive across consumers and businesses globally;
- the acceleration of cash, check and wire transfer displacement as V's new flows initiatives penetrate a broad range of new use cases with very large total addressable markets;
- sustainable high-teens growth across value-added services, both from existing services and new offerings; and
- new flows and value-added services becoming a larger part of V's revenue mix and growing faster than consumer payments.
Based on V's YTD results and long-term outlook, my final thoughts remain unchanged from those reflected in my prior posts.
Heightened broad market volatility is likely to persist over the short term and V's share price can exhibit wild swings. I plan to continue to accumulate Visa on pullbacks...not when V's share price increases ~6.5% in one day!
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long V.
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
