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Visa - earnings drive onwards

Nicholas Hyett | 24 July 2019 | A A A
Visa - earnings drive onwards

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Visa Inc USD0.0001 'A'

Sell: 196.97 | Buy: 196.98 | Change -3.29 (-1.64%)
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Third quarter revenues rose 11% year-on-year to $5.8bn, adjusted profits also up 11% to $3.1bn. Earnings per share rose 14% thanks to the ongoing buyback programme.

The board has announced a quarterly dividend of $0.25 per share.

The shares were broadly flat in pre-market trading.

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Our view

Despite appearances, Visa isn't a 'credit card company', not really. It's the world's largest payment processor, handling payments worth $8.1trn across 124bn transactions last year.

It doesn't lend consumers money or run accounts, so it's not on the hook for the money if a customer defaults. Nor does it, generally, take direct fees from businesses who accept Visa cards for payment. Instead, Visa charges the banks for transferring funds.

Service revenues are charged to card issuers, and are calculated based on the value of the transactions. Data processing revenues depend on the number of transactions that take place, and are charged to the bank of both the customer and the receiving business. Cross border transactions are even more lucrative, with additional fees and currency conversion revenues.

That's a very attractive business model.

Additional transactions are virtually costless to Visa, so extra revenue turns straight into profit. Capital expenditure is limited, meaning profits convert well into cash.

With net debt substantially less than one times EBITDA (earnings before interest, tax, depreciation and amortisation), that surplus cash can be returned to shareholders through a combination of dividends and share buybacks. The emphasis is on the latter, meaning the prospective yield is a modest 0.6% next financial year.

The payments industry is going through a lot of change at the moment, with competition from start-ups and more established rivals. But Visa sees opportunities too, and that's driving the group to expand into new payment technologies and geographies.

Contactless payment has been a major opportunity, increasing card use in small transactions. Almost 40% of Visa's contactless transactions are processed entirely in VisaNet, and with the rollout in the US just getting started, there's still years of growth potential.

The shares are trading on 29.8 times expected earnings, a 33.7% premium to the longer-term average and close to an all-time high. That creates significant short term volatility risk if the stock were to de-rate. However, we think Visa's strengths mean it could still be of interest to those prepared to take a long term view.

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Third Quarter Results

Revenue growth was driven by a 9% increase in payment volumes, a 7% increase in cross-border volumes and 12% increase in the number of transactions processed.

Service revenues, which are based on payment volumes in the prior quarter, rose 10% to $2.4bn. Data processing revenues rose 13% to $2.7bn while international transaction revenues grew 8% to $2bn. Incentives paid to clients were worth $1.5bn, or 20.9% of gross revenue.

Operating expenses fell 18% to $1.9bn. However, that largely reflects one off costs incurred last year, without which costs would have risen 10%.

Visa generated operating cash flow of $8.7bn, lower than last year on account of litigation paid out to retailers over last year's settlement on anti-competitive charges. And after accounting for $2.7bn of share buybacks and dividends, the group's net debt position rose to $5.5bn.

Looking ahead, the group expects underlying net revenue to rise by low double digit percentages, with a c. 10% increase in adjusted operating expenses.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.