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Visa’s Valuation Premium Is Intact on Its Relative Outperformance

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Consistent performer

Visa’s (V) stock has risen 15% over the past six months, mainly due to consumer spending, new partnerships, and geographic expansion.

The company has been thriving amid higher competition, technology upgrades, and strong network expansion. Visa’s partnership with PayPal (PYPL) could allow it higher penetration in terms of online purchase transactions.

Visa has consistently rewarded its shareholders through dividend and share repurchases. In fiscal 4Q16, the company declared a quarterly dividend of $0.17 per share, compared to $0.14 in the previous quarter. The company’s dividends paid translated into an annualized dividend yield of 0.80%.

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

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

Together, these companies form 2.4% of the Technology Select Sector SPDR ETF (XLK).

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Strong growth outlook

Visa is trading at ~24.8x on a one-year forward earnings basis, compared to its peers, which are trading at an average of 15.5x. Visa has been commanding premium valuations on its high growth, sustainable performance, diversified earnings, strong brand, and balance sheet. The company is well-positioned for expansion across major continents following its Visa Europe acquisition.

Visa remains a strong performer due to its payment volumes rising on its partnerships with USAA and Costco (COST) and the lower negative impact of the US dollar. Visa’s operating cash flow stood at $5.6 billion in fiscal 2016. Its operating margins in the year stood at 66%. 

For fiscal 2017, the company expects a 16%–18% rise in its revenue in dollar terms, including the negative 1%–1.5% impact of the strong US dollar.

Visa is pitching for more incentives in a bid to penetrate new and growing markets. Its operating margins are expected to be in the mid-60s in fiscal 2017.

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