12 Nov Visa (V)
Visa, along with American Express (AXP) and Mastercard (MA) control just over 90% of every consumer transaction worldwide. Every time you or anyone else pays for a product a small percentage of the total cost goes back to the credit card provider for providing the network that the payment is made on. Just think about that. That is on average 2.5% of every single purchase made around the globe. When you add it all up the amounts are staggering. Visa, for its part, controls about 50% of these payments. Visa’s four data centres, which cover its worldwide operations, can perform up to 30,000 simultaneous transactions and up to 100 billion computations every second.
What we love about this company, is that they make massive amounts of cash and love to return it to investors. In 2019 they generated $13 billion in cash flow and returned $11 billion of this in dividends and share buybacks. And the bigger the increase in global growth the more cash they generate. It means more cards in circulation and more money being spent on each card. It is why this stock is one of our favourites and can be found in our Global Growth portfolio.
The global move away from cash is also playing right into Visa’s hands. Australia is the world leader in contactless payments. When we go shopping we are asked if we want to use payWave (a Visa product), and over half of the time, we do. It has made the move away from being a cash-based society that much easier. And the less cash we use – the more money Visa makes.
But did you know that in the US half of all business transactions are still processed using cheques? And that in Europe cash plays a similar role? It’s astounding to us here in Oz. But just imagine when the rest of the world catches up to us in terms of contactless payments. In five years no one will be using cash and everything will be going through some sort of card payment. And who will benefit the most from that?
In the last few years, Visa has also been focusing on expanding its business in Latin America and the Asia Pacific region. They have instigated co-branded deals with banks and other financial companies in Singapore, Thailand, and Malaysia amongst others. And have made strong inroads into India. China remains aloof at this stage but if it can ever be cracked it will give Visa a huge boost in revenue.
Being a market leader with one of the biggest brand names worldwide you can bet they will be able to splurge massive amounts of money investing in new transaction types. Digital payments have been growing exponentially and have only expanded since the global pandemic hit in March of this year. From 2014 to 2018 retail e-commerce numbers rose by 22.5%, but mobile sales rose by a staggering 227%.
As CFO Vasant Prabhu recently stated in their Q3 earnings call, “This works in our favour because Visa’s share of digital commerce, where cash is not an option, is approximately three times greater than the physical point of sale”. Having the money and the brand name gives you the power to dominate in any area of your choosing. Visa is already making moves in the fintech and cryptocurrency areas and it wouldn’t surprise to see them dominating there as well.
Visa, like most other financial companies, took a beating in the first few months of the year as the coronavirus took hold. They make money when people spend money, so when the economy takes a hit so does Visa. However, the share price has bounced back strongly as markets re-opened and shoppers moved online rather than buying in person and using cash. Risk wise, Visa doesn’t issue credit cards so they have none of the default risk or exposure to moves in the interest rate that other issuers do. After bouncing hard off of March lows the stock is now up 12% year to date, well ahead of the market.
Visa’s balance sheet is incredibly strong, and its growth potential is enormous. Visa, along with Mastercard and American Express have so far had trouble getting a foot into emerging markets, but it is only a matter of time before they manage it. And when they do, both revenue and profit will skyrocket. You’ll want to have Visa in your portfolio when it happens. In the meantime, they will continue benefitting from the switch from cash to card to contactless to digital to mobile and will keep increasing in value accordingly. A definite long term hold for us here at Capital 19.