6 reasons to buy Visa stock like there’s no tomorrow

Visa (five 0.20%)one of the world’s leading payment network providers, went public in 2008. If you invested $10,000 in the IPO, your investment would now be worth over $250,000 and your annual dividend would be nearly $1,900.

Some investors may be reluctant to buy Visa stock after the historic rally. But let me explain why it’s still a good long-term investment for six simple reasons.

Image source: Getty Images.

1. Visa operates a simple, low-risk business.

Visa is often considered a credit card company, but it does not issue cards. It only operates a global payment network that charges merchants a “swipe fee” (usually 1.5% to 3.5%) to process transactions. Banks and other financial institutions work with Visa to issue co-branded cards and are responsible for servicing all debt.

Visa’s rival MasterCard (mom -0.39%) Although it uses the same low-risk business model. American Express (AXP -0.35%) We issue our own cards and take responsibility for them. That’s why Visa ended its latest quarter with a manageable debt-to-equity ratio of 1.3. This is much higher than Mastercard’s 4.7 ratio and American Express’ 8.2 ratio. This simple business model makes Visa more attractive than the more leveraged financial industry.

2. We share almost an oligopoly in credit card payments with MasterCard.

Visa-branded cards account for approximately half of all credit cards in circulation and half of all card-based payment volume. Visa and Mastercard control more than 90% of the global payment processing market, excluding China.

This near-oligopoly forces most businesses to accept Visa and Mastercard and reluctantly pay swipe fees for those transactions. That flywheel is what continues to fuel Visa’s growth, widen its moat, and lock in customers and merchants.

3. Growing at a steady pace

From fiscal 2013 to fiscal 2023 (which ended last September), Visa’s revenue grew at a compound annual growth rate (CAGR) of 11%, and its earnings per share (EPS) grew at a 16% CAGR. During that decade, the company bought back more than a fifth of its stock.

Visa’s revenue growth will slow in 2023 as rising inflation and interest rates curb consumer spending. However, as inflation cools and interest rates gradually fall, these headwinds will dissipate. Analysts expect revenue to grow at a CAGR of 10% from FY 2023 to FY 2026, along with EPS growing at a CAGR of 14%.

4. The company’s stock appears reasonably valuable.

Based on these expectations, Visa’s stock trades for 25 times next year’s earnings. That’s slightly cheaper than Mastercard, which trades at 30 times forward earnings. Visa also repurchased $10.9 billion of stock in the first nine months of fiscal 2024, with $18.9 billion still remaining authorized for share buybacks. These consistent buybacks suggest the stock remains undervalued relative to its long-term growth potential.

5. Regulatory challenges can be overcome.

Visa’s biggest long-term challenge is the threat of stricter regulation. For nearly two decades, Visa and Mastercard have been under constant pressure from individual merchants, merchant groups and antitrust regulators to lower swipe fees.

In March of this year, Visa and Mastercard finally reached a preliminary agreement with several U.S. merchant groups to reduce swipe fees by at least 4 basis points over the next three years and cap average fees over the next five years. But last June a U.S. court rejected that agreement and forced the two companies to negotiate lower fees.

These pressures have led many investors to stay away from Visa and Mastercard, but these regulatory issues will eventually have to be overcome. Even if swipe fees had to be reduced by 10 basis points in the US, this would only be a small portion of the total fees. They could also offset that pressure by raising swipe fees in other markets.

6. Warren Buffett still likes stocks

Lastly, Visa remains one of Warren Buffett’s major holdings. Berkshire Hathaway (BRK.A -0.14%) (BRK.B -0.21%). Buffett began acquiring Visa in 2011, and the $2.27 billion position now represents 0.7% of Berkshire’s overall portfolio. Berkshire Hathaway has reduced its position slightly in 2021 but has not sold any additional shares since.

We believe this is a green signal for Visa, as Berkshire Hathaway has reduced many other major holdings, including: apologize and bank of america –Over the past year S&P 500 We set a record high.

Visa’s stock probably won’t explode anytime soon. But patient investors who want a financial stock that can generate steady returns for decades to come should buy shares of Visa before the bull market rushes in.