Image Source: Visa
Payment processing giant and simulated Best Ideas Newsletter portfolio holding Visa turned in an impressive level of free cash flow generation in its fiscal year 2018, and the company continues to grow at a double-digit rate while boasting robust operating margins.
By Kris Rosemann
Simulated Best Ideas Newsletter portfolio idea Visa (V) reported a solid finish to its fiscal year 2018, results released October 24, and management’s fiscal 2019 outlook remains solid despite a number of risks facing the company, including exchange rate shifts, the potential for a hard Brexit, economic disturbances in select markets as seen in Turkey in Argentina, and geopolitical uncertainty such as trade disputes. Visa remains a tremendous free cash flow generator, and it expects free cash flow to continue growing impressively in fiscal 2019 as its network effect remains in full force. Though its dividend yield leaves much to be desired, the company continues to return cash to shareholders and announced a 19% increase to its quarterly dividend for the first quarter of fiscal 2019.
Visa’s net operating revenues in its fiscal fourth quarter grew 12% from the year-ago period thanks to ongoing growth in payments volume (up 11% in constant currency), cross-border volume (up 10% in constant currency), and processed transactions (up 12%). One-time items once again impacted the company’s operating margin as did higher personnel expenses, and its GAAP operating margin contracted by three percentage points from the comparable period of fiscal 2017 while its adjusted operating margin was flat at roughly 66%. GAAP net income leapt 33% on a year-over-year basis in the quarter, and GAAP net income per share increased 37% to $1.23 thanks to higher non-operating income, a lower tax bill, and a lower share count.
Visa’s high-margin and capital-light operations drive its robust free cash flow generation, and a 38% year-over-year increase in cash flow from operations in the full year fiscal 2018 drove a 41% jump in free cash flow generation to $12 billion. This robust free cash flow figure checks in at 116% of GAAP net income and ~58% of net operating revenues. Capital spending in the year was roughly 3.5% of net operating revenues, highlighting the low capital-intensity of the business, and cash dividends paid in the fiscal year came in just above $1.9 billion. The company continues to aggressively buy back its shares ($7.2 billion worth repurchased in fiscal 2018), and it expects to return at least $11 billion to shareholders via dividends and buybacks in fiscal 2019, at least $8.5 billion of which is tabbed for share repurchases.
The company finished fiscal 2018 with $13.2 billion in cash and short-term cash-like securities–though $1.5 billion of this is restricted cash tagged as US litigation escrow, and it owes Visa Europe a payment of just over €1.1 billion in June in accordance with its acquisition agreement–compared to $16.6 billion in long-term debt. It also holds $4.1 billion in long-term investment securities, and the company was able to pay down $1.75 billion in long-term debt in fiscal 2018.
Looking ahead to fiscal 2019, Visa expects to achieve nominal net revenue growth in the low-double-digit range despite an increase in client incentives to 22%-23% of gross revenue from 21.7% in the fourth quarter of fiscal 2018 as a result of a large number of client renewals in fiscal 2019. Management does not expect the cadence of revenue growth to be smooth through the course of fiscal 2019 with the second and fourth quarters potentially being the weakest and strongest, respectively. Expense growth may be lumpy in fiscal 2019 as well, and the company expects a growth rate in the mid-to-high-single digits for operating expenses adjusted for special items, which implies a year of adjusted operating margin expansion is in store. Non-GAAP earnings per share growth is expected to be in the mid-teens.
Most importantly, Visa expects to deliver free cash flow generation in excess of $13 billion in fiscal 2019 after capital spending of approximately $800 million as it continues to invest in hardware, support growth, and cybersecurity, among other development and upgrade initiatives. The company’s network effect is a significant competitive advantage, and that a company of its size can continue to deliver double-digit revenue growth year after year should not be lost on investors. This is due in large part to material secular trends, and as management noted in its quarterly earnings call, “The opportunity to digitize cash in new and different ways has never been better.”
We believe Visa is one of the strongest operators in one of the most attractive industries and plan to continue highlighting it in the simulated Best Ideas Newsletter portfolio for the foreseeable future. Our fair value estimate currently sits at $141 per share, but this may be subject to change as we roll the model forward after the company releases its 10-K.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.