Can This Growth Stock Be A Dividend Champion
IntroductionWhen I look at the companies I analyze, I see many unknown firms and brands. However, Visa (NYSE:V) is probably one of the most well known brands in the western world. Visa is a credit card company. It is a payment technology company that operates a retail electronic payments network worldwide.
The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. Visa’s credit cards are widely accepted worldwide. There are four major credit card companies, and Visa is among them. The others are MasterCard (NYSE:MA), Discover and American Express (NYSE:AXP).
While Visa is a financial corporation, it is important to know that unlike traditional financial corporations, like banks, that make their profits on interest margins, Visa makes its profits by charging commissions from businesses that allow payments with Visa’s credit cards.
Visa is a relatively new publicly owned company. As a dividend growth investor, I try to look at the prospects for Visa to become a dividend champion in the future. Since its IPO, the stock has skyrocketed due to its fantastic performance, and I will try to analyze if the current price is justified.
V data by YCharts
FundamentalsWell, this is for sure where Visa shines. Not many blue chip companies can show very high growth for such a long period of time, while maintaining a conservative balance sheet.
Visa has managed to increase its revenues every year since 2008. An impressive track record. Over the past 5 years, Visa’s revenues grew from $8 billion to almost $13 billion. That is a CAGR of 9.52%.
V Revenue (Annual) data by YCharts
When looking at the EPS, the picture is even better. The company has been raising its EPS consistently since it became public. Even the small drawback in 2012 was quickly forgotten.
Over the past 5 years, Visa grew its EPS from $4.01 to $8.62. That is a CAGR of 16.54%.
The analyst estimates for Visa are also very positive, with forecasts for EPS to continue growing in double digits in 2015 and 2016. EPS is expected to reach $10.3 in 2015 and $12 in 2016.
V EPS Diluted (Annual) data by YCharts
As a dividend growth investor, I try to focus on the dividend. The disadvantage here is that unlike blue chips, like Altria (NYSE:MO), Johnson Johnson (NYSE:JNJ) and PepsiCo (NYSE:PEP), Visa doesn’t have a super long track record of dividend hikes to support its status as a dividend growth stock.
However, as I look at Visa’s dividend history, and listen to the company’s management, I understand that the company is devoted to paying back its shareholders.
Over the past 5 years, the company has increased its quarterly dividend from 12.5 cents a share to the current rate of 48 cents a share. This is a CAGR of 26% over the past 5 years. It is hard to believe that the company will be able to maintain the same rate, but the future growth is still forecasted to be robust.
The reason for the fast future growth is the company’s high EPS growth forecasts by analysts and the low payout ratio that stands at the moment at less than 20%. That gives a lot of room for more dividend hikes.
The Achilles’ heel is the dividend yield. Due to the low payout ratio and the high P/E ratio, investing in Visa as a dividend growth stock is only for long term investors. As the company keeps growing its EPS and dividend, future yield on cost can become much higher.
V Dividend Yield data by YCharts
Another advantage of investing in Visa is the fact that the company has basically no debt. As I said before, Visa is an unusual financial institution. The fact that its earnings come from commissions allows it to stay debt free.
V Debt to Equity Ratio (Quarterly) data by YCharts
Another way to see the management’s commitment to paying back shareholders is the massive share buyback plans. The buybacks are consistent, and in December 2014, the management announced a new $5 billion share buyback program. This is roughly 3% of Visa’s outstanding shares.
V Stock Buybacks (Quarterly) data by YCharts
ValuationThis is another Achilles’ heel. Currently, Visa has a pretty high valuation. Most metrics that I look at show that the current valuation is probably at its highest.
The P/E ratio is over 30, and P/S and P/B ratios are at their peaks. This is certainly a disadvantage. The bright spot is the fast growth that Visa has shown and is expected to keep showing.
When looking at the forward P/E for 2016 we get a ratio of 22. It is still high, but more reasonable in comparison to the current P/E of over 30.
The high valuation might imply that it would be better to wait for a dip in the share price in order to have a better entry point. Another option is buying the shares over a period of time in order to average down the price if it drops in the future.
V PE Ratio data by YCharts
OpportunitiesThis is the part I like the most in Visa. There are many opportunities in investing in Visa. The very fast growth will be fueled by several advantages.
The first one is the growth in e commerce. Looking at the reports from companies like Amazon (NASDAQ:AMZN) and Wal Mart (NYSE:WMT), we see that e commerce is growing very fast. E commerce is reliant mainly on credit cards, so it has the potential to boost Visa’s performance.