October 20, 2020

Visa: Huge Upside As Global Economic Activity Recovers From Pandemic (NYSE:V)

Visa (V) is one of my favorite buy and hold forever stocks that seems to get lost in the mix recently.

As investors patiently await the Q3 earnings season to determine economic recovery from COVID-19, I still remain extremely bullish on Visa stock.

Reuters reported Visa transaction volume has recovered from its bottom in April after global lockdowns dragged U.S. economic activity to a halt.

While renewable energy stocks have soared, digital payment stocks like Visa are trading at similar levels before the pandemic shocked the world.

ChartData by YCharts

Data by Ycharts

Digital payments are the future of global commerce and I’ll explain why Visa remains a core part of my retirement portfolio along with an overall risk-reward thesis for dividend growth investors.

Visa is a Digital Payment Giant

Visa stands as one of the most recognizable logos in the world. If you live in a western country then there’s a good chance you carry a Visa debit or credit card in your wallet right now.

Visa’s business model is extremely simple: Visa earns money every time you swipe or tap your card without undergoing any financial risks.

It’s important to understand that Visa is not a bank. They are the middleman between consumers and banks.

Making money with zero risks allows Visa to achieve extraordinary 51.37% net income margins, which is crucial during these uncertain economic times.

Basically, Visa is a license to print money (literally).

Global Payment Revenue Remained Strong Despite Pandemic

In fact, Visa reported a reasonable 17% decrease in revenue during Fiscal Q3 2020 during one of the worst economic quarters in US History via the Fiscal year Q3 2020 earnings transcript.

Revenue remained fairly robust at 4.8 billion during that quarter and Visa still managed to generate a profit while dozens of other companies sought out government bailout loans and slashed its dividends.

Source: Visa Q3 2020 Financial Results Presentation

Visa will recover in pace with the global economy because global spending is guaranteed to increase during the holiday seasons.

I think the global pandemic will make this Christmas season the most memorable in history and we should all spend time with loved ones and enjoy each and every moment moving forward.

Dividend Growth Outlook

If you’re a dividend growth investor like me then you want to see a record of rising dividend payments along with revenue growth.

Visa has increased its dividend every year since its IPO in 2008 and the stock has soared from $11 to $206 as of writing this article.

ChartData by YCharts

A 20.11% 5-year dividend growth rate provides investors with plenty of capital appreciation and rising dividend income to reinvest in more shares or simply supplement your retirement income.

While the 0.58% yield isn’t exactly newsworthy, I find it comforting that both Ally Bank and Marcus by Goldman Sachs pay 0.60% on high yield savings accounts.

Visa shareholders receive a similar yield to high yield savings accounts with additional opportunities for capital growth.

Since the Fed announced its plan to keep interest rates near zero for the next several years, I think investors should look into dividend growth stocks as an alternative to low-interest cash savings.

India, China & Sub-Sahara Africa Are Big Opportunities for Growth

The COVID-19 pandemic forced a lot of traditionalists to reassess their role in the global economy.

Brick and mortar businesses suffered massive losses during lockdowns while online e-commerce soared to record numbers.

Visa will benefit alongside the rise in online e-commerce naturally since online consumers will purchase items using digital payments.

But I think the most exciting development could occur outside the western world.

India, China, & the African Continent possess some of the largest populations that don’t use digital payments on a daily basis.

Visa, along with other digital payment solutions like Paypal (PYPL) and Mastercard (MA), have plenty of growth in the future as these economies join the digital gold rush.

More Shutdowns Could Hurt Visa Stock in the Short Term

The future looks bright for Visa but there could be more short term hurdles along the way. If global COVID-19 cases don’t decrease over time then more government may turn towards semi-permanent shutdowns to control the virus.

Visa depends on strong economic activity to generate revenue. Another shutdown would cause revenue and profits to plummet.

Conclusion

My retirement strategy is to own dividend growth stocks that maintain a strong brand and wide moat.

Visa also returned $1.6 billion in dividends and share repurchases during the fiscal year Q3 2020.

Visa fits this bill perfectly plus digital payments will only increase as we move towards a cashless society.

Don’t overthink this one. Visa has one of the most iconic brands in the world and has a lot of growth ahead.

My long term price target is $300 for Visa stock and I’ll continue adding to my position over time.

Disclosure: I am/we are long V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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