When a company hikes its dividend, this typically means the board of directors and management team have confidence that the company’s future is bright. This is especially true when the dividend is lifted by a double-digit percentage, which occurred last month with Visa‘s (V -0.09%) 20% jump in its quarterly dividend per share to $0.45.
Management is clearly optimistic regarding the company’s prospects. Why is this the case? And is the stock a buy for dividend growth investors? Let’s take a deeper look at Visa’s fundamentals and valuation and try to address these questions.
Revenue and earnings keep chugging higher
With nearly 4.1 billion debit and credit cards in circulation as of June 30, Visa is the largest publicly traded payments processing company in the world. Putting this into context, the next-biggest publicly traded peer, Mastercard, had just under 2.6 billion cards in circulation as of June 30. And yet, investors seem to value Mastercard stock a bit higher right now. Visa is trading at a forward price-to-earnings (P/E) ratio of 25.6 — below Mastercard’s forward P/E ratio of 28.4.
Visa’s net revenue surged 18.7% higher year over year to $7.8 billion in the fourth quarter (which ended Sept. 30). The company’s net revenue growth was driven by double-digit percentage increases in its payments volume, total cross-border volume, and processed transactions.
Despite inflation staying elevated in many markets throughout the world, consumers remained undeterred. Visa’s currency-neutral payments volume climbed 10.5% higher over the year-ago period to $2.9 trillion during the quarter.
Total cross-border volume soared 36% higher year over year for the quarter. Given that the borders of most countries were open throughout the entire duration of the quarter, this rebound in cross-border volume isn’t a surprise. And factoring out intra-Europe and the negative impact from discontinuing operations in Russia, cross-border volume growth was even higher — an astounding 49% in the fourth quarter.
As a result of steady consumer spending and the rebound in cross-border travel, Visa’s processed transactions increased 12.3% over the year-ago period to 50.9 billion during the quarter.
Visa recorded $1.93 in non-GAAP (adjusted) diluted earnings per share (EPS) for the fourth quarter. This was a sizzling 19.1% year-over-year growth rate. Visa’s operating expenses grew at a 20.3% clip in the quarter. That explains how non-GAAP net margin fell by 115 basis points to 52.5% during the quarter. This was offset by a 2.7% reduction in the company’s diluted outstanding share count to 2.1 billion shares, which is how adjusted diluted EPS growth outpaced net revenue growth.
With analysts anticipating 16.8% annual adjusted diluted EPS growth from Visa over the next five years, the company’s growth prospects remain strong. This is because the shift away from cash and to alternative payment methods is poised to continue in the years ahead.
The dividend is well covered
When compared to the S&P 500 index’s 1.6% dividend yield, Visa’s 0.9% yield won’t impress any income investors. But Visa has a few things going for it that I believe makes up for its low dividend yield. First, the yield is down a bit because of strong stock price appreciation over the past decade. The stock is up 491% over that time (compared to the S&P 500’s 190% gain).
The company’s dividend payout ratio is expected to clock in at just under 22% for its fiscal year 2023 ending next September. This provides Visa with more than enough capital to build out its payments network, reduce debt, and repurchase shares during opportune times. And because of the low dividend payout ratio, Visa can further expand the payout ratio with dividend raises that are faster than the rate of earnings growth.
A wonderful company at a decent valuation
Visa is a top-notch business with great growth potential. And yet, the stock looks to be trading at a favorable valuation.
Visa’s trailing-12-month price-to-free-cash-flow ratio of 25.4 is meaningfully lower than its 10-year median for this metric of 30.2. With the company’s growth profile appearing to be intact for the long haul, this makes Visa an intriguing buy for dividend growth investors.
Read More: Visa Boosted Its Dividend: Is the Blue Chip Stock Now a Buy?