Is Visa Cheap Enough To Buy After Releasing Its Latest Earnings?
Back in September, I showed you 3 Reasons To Buy Visa – And 2 Not To…
Today I give an update and answer – Is Visa Cheap Enough To Buy After Its Latest Earnings?
You can read the original article in full at the link above.
But if you don’t want to; here’s a quick recap of why I said you should avoid investing in Visa – for now.
Visa’s 0.6% Dividend
Over the last decade Visa’s paid out a total of $4.45 per share in dividends.
At today’s share count of 2.234 billion shares that’s equal to $9.94 billion paid out to shareholders in the last decade.
Plus, in the last decade it grew its dividend 785% from $0.13 per share in 2010 to $1.15 per share now. This is an annual dividend growth rate on average of 78.5% per year.
These dividend payments and the growth in these payments will help you earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
It can do this because it earns huge profits and cash flows. Which is reason #2 to buy Visa to Depression Proof Your Portfolio.
Visa Earns Huge Profits
Over the last decade it earned an average operating income margin of 63.1% per year.
I look for anything above 10% on a consistent basis so Visa surpasses this number.
Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operation profit margins above 10% over long periods of time.
This makes Visa a great operating business.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 42.2% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.
If companies are consistently above 5% on this number, it makes the company a cash machine that spits out more and more cash from its operations.
Visa surpasses my thresholds on both important metrics and that makes it an incredibly safe investment.
These profits also allow it to continually reinvest in operations. And to pay you a large and growing dividend as well… Whatever is to come in the next few months or years.
Plus, they also allow Visa to have low debt which is reason #3 to buy its stock.
Visa Has Low Debt
As of this writing its debt-to-equity ratio is 0.59.
And its total liabilities as a percentage of its balance sheet is only 54.4%.
I look to buy companies that have a debt to equity below 1.
Because the lower debt levels the company has, the lower chance it has of going bankrupt. And this makes it a safer investment.
Visa’s continued fantastic profits and cash flow its able to have ultra-low debt levels makes investing in its stock even safer.
But what about its valuation? Is it cheap?
This is the first reason to wait to buy its stock…
Visa IS NOT Cheap
With the markets at or near all-time highs you’d expect a fantastic stock like Visa to be selling at an enormous valuation.
And it is.
As of this writing its P/E is 38.2.
Its P/CF is 36.2.
And its forward P/E is 34.4.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This means, at its current valuations that Visa is overvalued by a large amount.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Visa being overvalued it makes the investment riskier.
The Coronavirus Will Harm Visa
Most of the time in this section I tell you why a business won’t be harmed by the coronavirus.
But Visa will.
Due to the mass unemployment people may stop paying their mortgages.
They may stop paying their student loans.
They may stop paying their car payments.
And they may stop paying their credit card bills and buying as much stuff…
This was illustrated when Visa released its most recent quarterly report on July 22nd, 2020.
- Revenue fell 17% from the 3rd quarter of 2019 to the 3rd quarter of 2020.
- And net income fell 23% from the 3rd quarter of 2019 to the 3rd quarter of 2020.
This in large part due to a 10% reduction in payment volume and a 13% decline in total transactions processed in the quarter.
With tens of millions still out of work in the United States and hundreds of millions out of work worldwide – plus the pandemic still ongoing – Visa’s business will be harmed in the short to medium term.
Will it crush the company?
But combine this with its huge valuation and you should wait to buy Visa stock until things are more certain and it’s cheaper.
If you’re looking for a solid, safe, stable, dividend paying, cheap, and enormously profitable investment to Depression Proof Your Portfolio – consider investing in Visa. But only when it’s cheaper.
This thesis to avoid Visa until it’s cheaper and more clarity about how the coronavirus will affect it continued playing out after it released its most up to date quarterly earnings on January 28th, 2021.
- Revenue fell 6% in the year-to-year quarterly period to $5.7 billion.
- Operating income fell 4% in the year-to-year quarterly period to $3.84 billion.
- And net income fell 4% in the year-to-year quarterly period to $3.1 billion.
These due to the still ongoing coronavirus pandemic I mentioned in September that would negatively affect the company’s results.
Because of this, Visa shares are about flat with what they were in September… Even though the overall market is up about 11% in that same time.
With the pandemic still raging, Visa will still be harmed to some degree going forward.
Again, this won’t crush the business… But it is something to be watched.
The more important thing is that because of the fall in Visa profits combined with the flat share price since September, it’s even more overvalued than it was then.
Its P/E is now 44.8.
Its current P/CF is 44.5.
And its forward P/E is 37.5.
With Visa being overvalued it means there’s less margin of safety owning its stock. This means you have a lower chance of earning high investment returns owning it going forward. And these make it a riskier investment.
And for this reason, I continue to recommend you avoid its stock… Even though its an otherwise great company.
Click the links below to see the stocks we recommend to Depression Proof Your Portfolio and earn safe investment returns.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.