There are two big schools of thought in investing. In a single school, investors think about growth, buying businesses they hope are much larger five, 10, or 20 years in the long term. In the alternative school, investors look for yield, buying dividend-paying stocks to construct passive income and a reliable cash-flow stream for his or her portfolios. In spite of everything, there are greater than simply these two considerations when buying stocks, but growth and yield are two of the essential facets.
Dividend-growth investing combines the best possible of every worlds. Dividend-growth stocks are ones that not only make regular money payments to investors but also have a growing business that will fuel dividend growth over the long haul. The fitting dividend-growth stock could also be Visa (NYSE: V), the worldwide payments giant.
Today, you’ll have the opportunity to purchase shares for a ten% discount from the stock’s all-time highs set earlier this yr. Here’s why now may very well be the time to buy the dip on Visa stock.
Visa: A take rate on global spending
Visa is a company most of you’ll know. It’s the world’s largest bank card, debit card, and payments network, serving 4.5 billion credit/debit cards as of last quarter. That’s up from 4.2 billion within the equivalent quarter a yr ago. An unlimited percentage of the world’s consumer spending runs on the Visa network, from the USA to Europe to emerging markets in Asia and Africa.
The business model works barely differently than chances are you’ll imagine. Despite the incontrovertible fact that Visa is the brand on a ton of cards, it isn’t actually a bank or credit issuer. Banking partners akin to Bank of America or JPMorgan Chase are those taking credit risk. Visa makes money by taking a cut of every transaction spent on its network, which it then splits up and shares with its banking partners.
Visa’s business is effectively a take rate on global economic growth. First, as global consumer spending grows, Visa’s payment volume grows. Second, Visa benefits from the worldwide transition of cash payments to cashless digital transactions. These are two easy tailwinds which have been in place for multiple a few years and will proceed within the approaching a few years as well.
Regular growth, inflation protection
For those who occur to check out Visa’s financials over time, revenue keeps moving up and to the suitable. Excluding the pandemic period, when global spending ground to a halt, Visa’s trailing-12-month revenue has grown at a gradual clip for the last 10 years. Ten years ago, revenue was a tad over $12 billion. Over the past 12 months, it was $35 billion. I’d expect this regular growth to proceed over the following 10 years as well.
Operating profit has been even higher. Visa has minimal variable costs on its network, meaning it earns high incremental profit margins when revenue grows. This leads to bottom-line profit margin expansion. Operating margin is now 67%, highlighting how amazing Visa’s business model is. This margin should expand barely over the following 10 years with incremental margins well over 90% on latest payment-volume flows.
Don’t forget inflation protection. Since Visa’s revenue comes as a percent of payment volume on its network, it’s one amongst the few businesses that benefits from inflation. Higher prices mean more money coming to Visa as an inherent inflation edge. It truly is amongst the very best business models on this planet. For this reason payment volume grew from $10.4 trillion in 2021 to $12.3 trillion in 2023.
V Dividend Per Share (TTM) data by YCharts.
Why the dividend can proceed to grow
Okay, that’s enough in regards to the business model. What in regards to the recent numbers? Last quarter, Visa’s payment volume grew 7% yr over yr. Nevertheless, resulting from faster growth from higher-margin cross-border volume and the expansion of its analytics business, Visa’s revenue grew 10% inside the quarter to $8.9 billion. Net income grew 17% to $4.9 billion.
Over the long haul, I expect Visa’s payment volume to grow at 5% to 10% annually from a mix of economic growth, inflation, and the transition to digital payments. Add in margin expansion and latest revenue lines, and I think earnings can grow at over 10% per yr.
It can mean tons of cash flow accumulating on Visa’s balance sheet that it would return to shareholders in the form of dividends. At Tuesday’s prices, Visa has a dividend yield of only 0.80%, but don’t let that dissuade you. The dividend per share has grown by a whopping 1,800% since being instituted in 2009. At $2.01 in the course of the last 12 months, the dividend per share is well below the $9.30 of free money flow per share Visa generates.
An unlimited separation of free money flow per share and dividend per share implies that Visa has room to grow its dividend by 4 times even when its free money flow per share doesn’t grow. I still think it could grow by an excellent amount resulting from the revenue and earnings drivers highlighted above. Plus, management is now aggressively repurchasing stock. Shares outstanding have fallen by 11% inside the last five years. Fewer shares outstanding mean more room to lift the dividend per share, all else being equal. It helps add some juice to free-cash-flow per-share growth.
Add every part together, and I believe Visa is the ultimate word dividend-growth stock. Buy the dip on the dominant payments giant and watch the dividends pile up in your brokerage account over the following few a few years.
Don’t miss this second probability at a potentially lucrative opportunity
Ever feel equivalent to you missed the boat in buying probably probably the most successful stocks? Then you definately definately’ll must hear this.
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Instantly, we’re issuing “Double Down” alerts for 3 incredible corporations, and there may be probably not one other probability like this anytime soon.
*Stock Advisor returns as of August 6, 2024
Brett Schafer has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Visa. The Motley Idiot has a disclosure policy.
Must Get Wealthy? Buy the Dip on This Dividend-Growth Stock and Never Sell was originally published by The Motley Idiot