Expensive Visa Faces Brexit Problems and Likely Slow Growth

The company will suffer from Brexit, and its earnings are likely to lag the industry's over the next five years.
By Siddhi Bajaj ,

After a robust fiscal first and second quarter, credit card company Visa (V) - Get Report may not be able to pull off a hat trick. That's because of internal and macro economic developments over the past few weeks.

Let's have a look at what changed. Below, we also unveil a time-tested moneymaking method that reliably reaps profits no matter what the broader economy or markets do.

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The timing of the two couldn't have been worse.

Visa reunited with Visa Europe after the European Commission gave its blessing in June for the €21.2 billion takeover.

Combined, the two boast 17,100 financial institution clients and partners, over 40 million merchant outlets, and three billion Visa accounts worldwide.

However, soon after this news came Britain's historic referendum to leave the European Union. With 29% of Visa's revenues coming from cross-border transactions, any tension between, or slowdown in the U.K. and E.U. markets would serve as a blow to Visa.

According to Christopher Donat, an analyst at Sandler O'Neill, lower consumer spending and currency fluctuations will also impact credit card companies like Visa and MasterCard.

Another unfortunate development would likely be the slowdown in migration from cash and cheque transactions to digital payments, which would otherwise have been speedy if the U.K. and E.U. had continued as one market

"Management's expectations for the deal to be accretive to Earnings Per Share (EPS) in the high single digits in coming years could be knocked down to mid-single digits post-Brexit," Donat said in the article.

As if trouble in Europe wasn't enough, a three-judge panel of a U.S. federal appeals court approved a settlement between VisaMasterCard and merchants who objected to the processing rates that the card companies charged. The merchants said that they paid excessive fees. Visa, MasterCard and others will have to pay between $5.7 and $6 billion.

Visa stock has a paltry dividend yield of 0.7%, is trading at 23.55 times forward earnings (more expensive than peers American Express at 11.33 times and MasterCard at 21.79 times) and has risen just 2.4% so far this year. This is while the S&P 500 and have risen 7% to all time new highs.

Furthermore, over the next half a decade, Visa is expected to generate earnings of 15.6%, underperforming the industry's 17.4% figure.

For that kind of total return, the price is too big to pay for Visa. There are better and easier ways to make money.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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