Although the Durbin Amendment had yet to go in effect, Visa (V) reported a terrific fourth quarter, which has made us even more bullish about the firm’s near-term and long-term prospects. Due to a better than expected outlook for 2012, and a favorable ruling by the Fed regarding the Durbin Amendment, we think Visa is now worth $126 per share, roughly a 25% premium to where the stock currently trades.
Management focused on returning cash to shareholders
What really sticks out about Visa’s fiscal 2011 performance is the dedication to return cash to shareholders. In addition to increasing the quarterly dividend by 47% to 22 cents, Visa bought back over $2 billion worth of shares. And on top of that, the firm announced a board authorization of another $1 billion.
CEO Joe Saunders mentioned that Visa only looks to buy shares when they look cheap relative to their valuation of the company, and since shares wallowed at a 30%+ discount to our fair value for most of their fiscal year, we are thrilled that they bought back so many shares. The buyback led to a net reduction of 4.3% of the float.
Furthermore, at an annualized rate of 88 cents per share, Visa is well on its way to paying a meaningful dividend. We think the firm could realistically afford to pay out closer to $2 a share in dividends, but we appreciate management’s conservative approach in the face of regulatory uncertainty and tax liability uncertainty going forward. A continuation of a lower capital gains tax makes additional dividend increases far more likely.
Continued operating excellence
We’ve previously discussed how Visa has a network that ranks amongst the most powerful competitive advantages of any company in the world. Management continues to spend on volume and support initiatives that increase and encourage use of Visa debit and credit cards. In fact, we were shocked to hear Saunders announce that Niemen Marcus will now accept Visa (MasterCard MA as well). It’s become almost offensive not to take the network behemoth’s card in this day and age.
International revenue growth accelerated in the fourth quarter, coming in at 22%, and we think CyberSource will continue to draw increasing online payments. Saunders said it best, when addressing the proliferation of digital wallets, when he noted that you pay with what’s in the wallet, not with the wallet. We think Visa will continue to be parked in a digital wallet as much as a physical wallet.
Though Visa Signature is not affected by Durbin the way PIN revenues are, management remains committed to increasing spending volume, regardless of the method. Some banks are helping them out on this issue, with a few limiting the amount of PIN transactions its customers can perform a month, and others, like mid-west regional TCF Bank TCB, are charging additional fees per PIN transaction.
Still, service fees grew by 21% in the fourth quarter and should continue to grow in to 2012 as the move towards a cashless society continues.
Forecast – better than expected
While the true extent of the hit that Durbin will bring to earnings is still unknown, management projects to grow earnings in the mid-to-high teens in 2012, on a low double digits increase in revenues. The company also expects to spend modestly on capital expenditures and throw off over $4 billion in cash.
After three consecutive years of 30%+ returns on invested capital (ROIC), Visa remains a growth story. We trust that management’s investments in both incentives and digital technology will continue to increase returns for shareholders. In spite of negative regulations, Visa is an international story and in the midst of a long-term shift in consumer spending habits that could benefit them for generations.
Since Visa has a premium brand, nearly impossible to replicate network, and double digits earnings growth going forward, we think shares are a bargain at $93, which is just 16x our 2012 earnings projection and provides a modest yield of nearly 1% (still better than short-term treasuries).