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Visa Commands Premium Valuations on Strong Performance

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Long-term returns

Visa (V) stock has risen by 12% over the past six months as a result of strong consumer spending, the addition of new clients, and volume growth from existing clients. The company has been thriving on higher prices, greater partnerships, and co-branded cards.

The higher penetration of online purchase transactions through partnerships such as PayPal can allow Visa to expand its network.

Visa has been consistent and prudent in rewarding its shareholders through dividend and share repurchases. In fiscal 3Q16, the company declared a quarterly dividend of $0.14 per share, which was in line with the previous quarter. The dividends paid translated into an annualized dividend yield of 0.70%.

Visa’s peers in the brokerage industry have the following dividend yields:

  • American Express (AXP): 1.8%
  • Mastercard (MA): 0.81%
  • Discover Financial Services (DFS): 2.1%

Together, these companies account for 2.3% of the Technology Select Sector SPDR ETF (XLK).

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Premium valuations

Visa (V) is trading at ~24.7x on a one-year forward earnings basis compared to its peers, which are trading at 15.4x. The market has been rewarding Visa with premium valuation because of its predictable growth, sustainable and recurring earnings, and a strong brand presence.

On the other hand, its share repurchase program to mitigate the effect of dilution shows that Visa has one of the best capital return programs among its Dow Jones peers. In the near term, the market is likely to reprice Visa to adjust valuations to this risk.

Strong play

Visa remains a strong play with positives that include the payment volume uplift from USAA and Costco, moderation in the dollar translation impact and oil prices, accretion from Visa Europe, and superior cross-border growth specifically from emerging markets that are slowly embracing digital payments.

For example, China is estimated to be an ~$8.4 trillion market opportunity. The Chinese market should continue to grow in the double-digit range, and it currently represents over half of the 9.5 billion cards issued globally.

Visa’s fiscal year operating cash flows in fiscal 2016 are expected to be $7 billion. Its operating margins are expected to be in the mid-60s in fiscal 2016. Visa expects its revenue growth, excluding currency impact, to be in the low double digits.

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