VISA INC. $159 (New York symbol V; Conservative Growth Portfolio, Finance sector; Shares outstanding: 810.6 million; Market cap: $128.9 billion; Price-to-sales ratio: 12.4; Dividend yield: 0.8%; TSINetwork Rating: Above Average; www.visa.com) operates the world’s largest electronic payments network. The company processes credit, debit, prepaid and commercial payments under the Visa, Visa Electron, Interlink and PLUS brands.
Visa gets its revenue from fees it charges card issuers and merchants for using its network. These charges are based on payment volume, transactions processed and other factors.
Moreover, Visa is a financial intermediary, so it doesn’t lose money if cardholders fail to pay their bills. Instead, banks that issue Visa cards assume liability, set repayment terms and evaluate customer creditworthiness. That cuts Visa’s risk.
In its 2012 fiscal year, which ended September 30, 2012, Visa earned $4.2 billion. That’s up 19.1% from $3.5 billion in 2011. The company spent $710 million on share buybacks in 2012. Due to fewer shares outstanding, earnings per share rose 24.2%, to $6.20 from $4.99.
These figures exclude several unusual items, such as a $4.1-billion charge to settle a class-action lawsuit. This litigation accused Visa and other credit card firms of unfairly preventing retailers from imposing an extra fee on customers who use credit cards to pay for their purchases.
As well, new rules that limit fees credit card firms can charge merchants to access their networks lowered Visa’s 2012 earnings by $0.15 a share.
However, revenue still rose 13.4%, to $10.4 billion from $9.2 billion. That’s mainly due to strong growth at Visa’s overseas operations (which supply 40% of its total revenue), particularly in developing regions like Latin America and the Middle East. Rising use of debit cards, which now account for 60% of Visa’s total transactions, is also fuelling its growth.
The company is still debt free and holds cash of $2.1 billion, or $2.56 a share. It plans to use its cash to buy back $1.5 billion of its shares by October 2013. Visa also raised its dividend by 50%. The new annual rate of $1.32 yields 0.8%.
The stock has jumped 109.2% since we first recommended it at $76 in our December 2010 issue. It now trades at 21.0 times the $7.57 a share that Visa will probably earn in fiscal 2013. That’s still a reasonable p/e ratio in light of the company’s strong brand and international growth prospects.
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