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Visa benefits from a network effect in that the greater the number of consumers who are plugged into a payment network, the more attractive the payment network becomes for merchants. This in turn makes the network more convenient for consumers. This pattern repeats itself which explains why so few networks have come to dominate electronic payments.
V's electronic payments network and card usage are in most developed markets. Since the nature of V's business is highly scalable, it leads to cost advantages. Essentially, the larger the payment network the greater in size and strength the competitive position becomes.
Summary
- I am working with a couple of young investors to help them create investment portfolios comprised of shares in high quality companies.
- Visa is my single largest equity investment and this recent acquisition of V shares is in keeping with my game plan to focus on increasing exposure to companies with which I am already familiar as opposed to initiating new positions.
- V is a wide moat company with growth expected to be achieved organically and via acquisition.
- FY2020 results released at the end of October 2020 were negatively impacted by COVID and management declined to provide FY2021 guidance.
- I do not expect challenging business conditions to continue in perpetuity and while shares are currently richly valued, I fully expect V to be a far more valuable company several years into the future.
Introduction
Over the past few years we have created a six figure portfolio for my daughter which consists of shares in the following companies:
- Alimentation Couche-Tard (ATD-b.to)
- BCE (BCE.to)
- Brookfield Asset Management (BAM-a.to)
- Enbridge (ENB.to)
- Intact Financial (IFC.to)
- The Royal Bank of Canada (RY.to)
- 3M Company (MMM)
- Berskshire Hathaway (BRK-b)
- Ecolab (ECL)
- Johnson & Johnson (JNJ)
- Mastercard (MA)
- Stryker (SYK)
In this January 7th article I disclosed the purchase of additional shares in two companies which I made on behalf of my daughter through her investment accounts. Today, we have added to her holdings with the purchase of shares in VISA Inc. (V).
I have been a V investor almost from the day the company went public on March 19, 2008 and I have added to my position over the years. V is my largest holding so this recent purchase of additional shares is in keeping with my game plan to expand my position in high quality companies as opposed to increasing the number of companies in which I have exposure.
Business Overview
Although V is an established market leader, there are ample growth opportunities since the payments industry continues to grow and evolve. V certainly has competition but it is the leader in the global electronic payment infrastructure. I am, however, hedging my bets by also holding a position in Mastercard (MA) and, if I could, I would acquire a stake in UnionPay; UnionPay, regretably, is not publicly traded.
I highly encourage you to review Item 1 and 1A in V's FY2020 10-K if you wish to learn more about the business and risk factors.
Q1 2021 results will be released just before January month end but if V's most recently published operational performance data (as at end of September 2020) is of interest to you, it can be accessed here.
V's growth has been organic and via acquisition. In November 2020, V announced the completion of its acquisition of YellowPepper, a fintech pioneer with proprietary technology and partnerships supporting leading financial institutions and startups in Latin America and the Caribbean. The acquisition of YellowPepper built on a strategic partnership and investment V made in YellowPepper in May 2018.
In January 2020, V announced it had signed a definitive agreement to acquire Plaid for ~$5.3B; Plaid is a network that makes it easy for people to securely connect their financial accounts to the apps they use to manage their financial lives. The Department of Justice (DoJ), however, stepped into the picture with an attempt to block V's acquisition of Plaid and rather than argue with the DoJ and risk raising that department's ire, V and Plaid recently announced the mutual termination of the merger agreement.
Credit Ratings
V's long-term debt is rated Aa3 by Moody's and AA- by S&P Global. Both ratings are the bottom tier of the high grade investment-grade rating category which suits my / my daughter's investor profiles.
Valuation
Business was negatively impacted by COVID-19 starting in March 2020 and when FY2020 results were released on October 28, 2020, management indicated the continuing impact of COVID-19 and the significant uncertainty in the global economy made it too difficult to provide a FY2021 outlook.
If we look at V's valuation on the basis of the current $201.59 share price and $4.89 in diluted EPS for FY2020 (versus $5.32 in FY2019) we arrive at a PE of ~41.22. This is definitely not a bargain basement valuation but let's compare the current valuation to that for FY2011 - 2020....28.44, 42.11, 29.34, 30.42, 30.06, 31.46, 40.72, 29.85, 35.32, and 44.73. As we can see, I could be waiting forever to invest in V if I was adamant that the valuation had to be at 20 times earnings or better. The current valuation is certainly not attractive but if business conditions improve then it is entirely possible that V's valuation could retrace to possibly the low to mid 30s. Were this to occur I would definitely acquire more shares.
Looking at adjusted EPS guidance on the basis of input from 35 analysts we see a wide range in FY2021 projected adjusted EPS ($5.12 - $5.94 with a mean of $5.45). On the basis of $5.45 and the current share price, the forward adjusted PE is ~37. Once again, not bargain basement for sure!
Dividend and Dividend Yield
V's dividend history can be accessed here; focus on the Class A common stock column.
On the basis of a $0.32/quarterly dividend and the current $201.59 share price, the dividend yield is only ~63 bps (not even 1%!). The shares acquired for my daughter are held in a non-registered account so when we deduct the 15% withholding tax, she is only receiving a ~$0.272 quarterly dividend for an annual dividend yield of ~54 bps.
Clearly, dividend income seeking investors are unlikely to invest in V. The rationale for acquiring V shares for my daughter, however, is not to generate significant dividend income but rather to position her to take advantage of the potential long-term appreciation in V's share price.
Final Thoughts
V has been my largest holding for several years and my average cost is ~$16.50.
I think that when V releases Q1 2021 results on January 28, 2021 we will see that V's business has improved relative to the last 3 quarters. If such is the case, we may witness an uptick in V's share price.
In all the years I have closely followed V, it has been on the very rare occasion that its valuation has been attractive. I certainly do not expect V's valuation to drop to the low 20s but if V's valuation were to drop to the mid 30s or lower, I would definitely acquire additional shares.
Stay safe!
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long V and all other stocks mentioned in this article.
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.
