Visa, one of my favorite stocks, is currently trading near its all-time high of $329.18 per share. Over the past year, the stock has gained about 2.58%. Now, here's where it gets interesting: about four to five months ago, I made a video titled "Visa Stock is Cheaper Than It Was 5 Years Ago." While most of the feedback on the video was positive, some viewers were upset by my statement that the stock was cheaper than it was five years ago. To clarify, if we zoom out, we see that Visa was trading at around $200 per share five years ago. At the time I made the video, the stock was at its all-time high of about $290 per share, which led to some confusion about my claim that it was undervalued.
The key concept to understand here is that stock price doesn’t necessarily reflect intrinsic value. A stock can hit a 52-week high and still be cheaper than when it's at a 52-week low. That's because stock price doesn’t equate to intrinsic value. The true value comes when stocks are priced below their intrinsic worth, which can sometimes mean buying a stock even at a 52-week high. For instance, just a few months ago, despite Visa being at a 52-week high, I believed it was still undervalued.
Looking at the numbers, the current forward price-to-earnings (P/E) ratio for Visa is 29.34, compared to its five-year average of 31.23. This means Visa is roughly 6% cheaper than it’s been historically.
For full transparency, Visa is one of the larger positions in my portfolio, ranking as my second-largest individual holding (excluding ETFs). As of now, I'm up about 51% on my Visa position.
When looking at the one-year chart for Visa, we see that after trading around $290 per share, the price dropped quickly to about $269. This dip came after the U.S. Justice Department sued Visa, accusing it of monopolistic behavior in the debit card market. However, I’m not too concerned about the lawsuit, especially since it didn’t involve competitors like MasterCard or American Express. The market seems to agree, as Visa’s stock has climbed back up to nearly $330 per share since the dip in September.
Fundamentals Analysis
Now, let’s dive into the fundamentals, especially from the perspective of dividend growth, as that’s my investing strategy. Visa’s starting dividend yield is low at just 0.72%, but its payout ratios are strong. The earnings payout ratio is 21.7%, and the free cash flow payout ratio is 22.56%. Visa has seen impressive growth in free cash flow over the past decade, with a compounded annual growth rate of about 11%. As a result, they’ve been able to grow dividends rapidly without straining free cash flow. In fact, their 10-year dividend CAGR is an outstanding 17.7%. Importantly, Visa has managed to keep its dividend payout ratio stable, making these dividend increases sustainable in the long run.
When we look at the company’s financial performance, Visa has shown impressive growth in revenue, earnings, and free cash flow per share over the past decade. One key metric to note is their return on invested capital (ROIC), which in 2024 was 28.65%, up from 25.6% in 2023. This indicates that Visa is highly effective at reinvesting capital into profitable projects, as high-quality companies typically achieve a ROIC above 20%.
Their gross profit margin was 80.4% last year, which is in line with their 10-year average of 80.8%, demonstrating stability in profitability. Additionally, their free cash flow margin, which tells us how much of their revenue converts to free cash flow, was an impressive 52.03% in 2024. This means that for every $100 in revenue, $52 becomes free cash flow.
Looking at Visa’s balance sheet, we see a low debt-to-assets ratio of just 0.2, indicating that their total assets far exceed their total debt. The current ratio is 1.28, meaning Visa can easily meet its short-term obligations. What’s even more impressive is their interest coverage ratio of 36.7, meaning they can cover their debt interest 36 times over with their earnings before interest and taxes. Visa also has significant total assets of around $34 billion, while its total debt is $20.8 billion, which means they could theoretically pay off all their debt if they wanted to. They are sitting on a strong cash position, which further bolsters their financial health. In summary, Visa continues to be a high-quality, profitable company with strong dividend growth potential and solid financials, making it a strong hold in my portfolio.
When you look at Visa’s fundamentals, it’s easy to see why it's such an attractive stock to analyze. But beyond the numbers, Visa’s business model is also compelling. One key factor I love is how Visa is protected against inflation. Over the past decade, inflation has fluctuated—early on, it was pretty stable at 1-2%, which is considered healthy. But in recent years, inflation spiked and, although it’s come down, it’s still a concern for many. The good news for Visa is that its business model has built-in protection against inflation.
Earning Per Share
How? Well, Visa’s revenue is directly tied to transaction volumes and transaction sizes. This means that as prices rise with inflation, the small percentage Visa earns from transaction fees grows as well, which can boost both their top and bottom lines. Looking at how Visa performed during the inflation surge in 2021-2022, their earnings per share (EPS) grew significantly—from $4.90 in 2020 to $5.63 in 2021, and up to $8.29 in 2023. Their revenue jump from 2021 to 2022 was huge—going from $24.1 billion to $29.3 billion.
Valuation
Now, you might be wondering if Visa is still trading at a good valuation at its current price of around $330 per share. To answer that, let’s dive into my stock valuation spreadsheet. First, I’ll look at the discounted cash flow (DCF) analysis. This method estimates the company’s value based on its projected future free cash flow. I’ve projected a free cash flow growth rate of 11.5% for Visa, which is in line with their historical performance and future earnings estimates. Based on this, I get a DCF price per share of $345.19.
Next, I’ll look at Visa’s historical multiples valuation. Visa is currently trading at a price-to-earnings (P/E) ratio of 27.1, which is lower than the 10-year average of 30.37. This suggests that Visa is about 11% undervalued, even at its all-time high. If we compare Visa’s P/E ratio to similar companies like MasterCard and American Express (which have an average P/E of 31.9), Visa’s intrinsic value would be around $310.66.
Finally, I’ll use the dividend discount model (DDM) to value Visa based on its dividend payouts and expected dividend growth. Assuming a 7.75% dividend growth rate and an 8.5% discount rate, the DDM price per share comes out to $339.54—almost exactly where the stock is trading now. With a 10% margin of safety, the acceptable buy price would be around $298 per share, and with a 20% margin of safety, it’s $265.
Conclusion
So, Visa is trading at fair value right now. If you apply a margin of safety, it’s not quite in the buy range, but not long ago, it was. There’s a lesson here: when news comes out that looks bearish at first, we need to consider whether it’s a short-term issue or a long-term one. In Visa’s case, the news earlier this year created a buying opportunity, and it’s now at a fair value price.
Overall, Visa is a high-quality company, and it’s rare to get a huge buying opportunity with it because it’s so well-regarded. If you’re looking for short-term gains, there’s no guarantee of that with Visa. However, if you’re planning to hold for the long term, I believe Visa is a solid pick. That’s exactly my plan for my personal portfolio. Let me know in the comments what you think about Visa—are you planning to buy or sell?
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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