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Visa - Finishing the full year with a flourish

Nicholas Hyett | 25 October 2019 | A A A
Visa - Finishing the full year with a flourish

No recommendation

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: 196.21 | Buy: 196.22 | Change -1.97 (-0.99%)
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Full year revenues came in at $23bn, up 11% year-on-year, with revenues up 13% in the final quarter. Underlying profit rose 15% for the year as a whole, to $12.4bn, with the ongoing share buyback boosting earnings per share so that they grew 18%.

The quarterly dividend increased 20% to $0.30 per share.

The shares were broadly flat in pre-market trading.

View the latest Visa share price and how to deal

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 in 2018.

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 cash profits, 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%.

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 contactless rollout in the US just getting started, there's still years of growth potential.

The shares are trading on 27.8 times expected earnings, a 24% premium to the longer-term average. 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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Full Year Results

Full year revenue growth was driven by a 9% increase in payments volumes, 6% increase in cross-border volumes and 11% increase in processed transactions.

Service revenues, which are based on payment volumes in the prior quarter, rose 9% for the year as a whole to $9.7bn. Data processing revenues rose 14% to $10.3bn and international transaction revenues rose 8% to $7.8bn. Incentives paid to clients were worth $6.2 billion and represent 21.2% of gross revenues.

Operating expenses rose 4% year-on-year to $8bn, or 11% if you exclude one-off expenses incurred last year.

Visa generated operating cash flow of $12.8bn, lower than last year on account of payments to retailers over last year's litigation on anti-competitive charges. The group returned $10.9bn to shareholders through a mixture of share buybacks and dividends during the year. Net debt fell 5.4% year-on-year to $4.7bn.

Looking ahead, the group expects underlying net revenue to rise by low double-digit percentages next year, with a mid-to-high single digit increase in operating expenses. That's expected to result in a mid-teens percentage increase in earnings per share.

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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 for more information.