Visa Inc (V) USD0.0001 'A'

Visa's net revenue rose by 10.0% to $8.8bn in the second quarter, beating market forecasts of $8.6bn. Underlying net income grew by 17% to $5.1bn, 3% ahead of expectations.

The results reflect a stable consumer spending environment, with growth driven by an 7.5% increase in overall payment volumes, when ignoring currency movements. Growth in the key US region was 5.6%, although this has slowed to around 4% in the first three weeks of April. Europe was the standout region for volumes which grew by 12.9%. Cross border payment volumes increased by 16%.

Free cash flow came to $4.3bn, whilst net debt had risen by 25.9% to $15.6bn since the year end.

There were $3.8bn in share repurchases and dividends over the period.

On an underlying basis Visa continues to expect low double-digit growth in net revenue, and low-teens growth in earnings per share.

The shares were up 2.2% in after-hours trading.

Our view

Global consumers have remained resilient in the first half of Visa’s financial year. As a payment and transaction giant, that's a trend playing nicely into Visa's hands.

Despite appearances, Visa isn't a 'credit card company'. It doesn't lend consumers money or run accounts, so it's not on the hook for the money if a customer defaults. Instead, Visa charges banks for transferring funds. That offers a level of protection in the face of an economic downturn.

A particularly sharp economic downturn could see credit defaults start to swell, but for now, Visa's benefiting from higher credit spend without that risk looming.

We are monitoring the fact that nearly 50% of Visa's total volumes are US-based. Here growth is proving harder to come by than in other regions. Despite this headwind, 2024 guidance remains intact. The outlook is being helped by strength in both cross-border transactions and value-added services, as well as slowing growth in incentives paid out to key counterparties.

But we’re concerned that pulling back on incentives now could be a short-term gain that may be at the expense of growth in future periods. With the cash-to-card transition arguably complete in the US, there are relatively few levers Visa can pull to mitigate any slowdown in its largest market. Another risk to be mindful of is tightening regulation, but for now that’s not proving to be hugely detrimental to business.

Debt servicing, which includes obligations for crucial client incentives, is currently easily covered by free cash flow meaning there's plenty of spare cash to go around. Surplus cash is being returned to shareholders through a combination of dividends and share buybacks. The emphasis is on the latter, meaning the prospective yield is a modest 0.8%. Remember no shareholder returns are guaranteed.

Competition from start-ups and more established rivals has become a greater risk recently. But it's not one Visa's left unchecked. The group's been making strategic acquisitions. These are more digital-focused financial tools and could also accelerate Visa's growth outside of the US. We're supportive of Visa's efforts to deepen its offering in this area, but it’s still playing catch up with its arch-rival Mastercard.

Long-term, we see payments in general, as an attractive business. Visa's attractive business model means that additional transactions are virtually costless, so extra revenue turns straight into profit. Visa's valuation's not as demanding as it's been in the past, but its growth rate has not been as impressive as some of its peers. Its relatively high exposure to the US means that may continue to be the case for some time to come.

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