Here's Why Visa's Dividends Will Bounce Back
Payment processing giant Visa Inc. (V) - Get Report has been in the news since it agreed to acquire Visa Europe in a deal valued at $23.4 billion, combining the brands globally after almost a decade of operation as separate units.
However, a paltry dividend yield of 0.6% caused a stutter in the proceedings, prompting investors to wonder if they should re-visit their faith in the world's largest payments network.
data by
So what's the inside scoop on the Visa tumble?
The Fluctuating Dividend Tale
A large part of the yield slump could be attributed to the rise in the counter's stock price, up 21% year to date. The rise is above MasterCard's appreciation, which has jumped by 17% while American Express dropped by 22%.
In 2010, Visa's dividend yield was around 0.75% and then remained between the narrow ranges of 0.62% and 0.66% between 2011 and 2014.
That said, dividends paid for Visa Inc Class shares have in fact risen over the last five years -- a mere 13 cents in 2010, 17 cents in 2011, 25 cents in 2012, 32 cents in 2013 and finally, 42 cents for 2014. This year it's paid out 36 cents already and should be making 50 cents for the full year, because it's announced a dividend of 14 cents payable soon, on top of the 36 cents already paid in the previous three quarters. In terms of growth, dividends grew by 30% in 2011, 47% in 2012, 40% in 2013, a 20% in 2014 and by 19 % in 2015.
With the proposed Visa Europe acquisition probably funded by Visa (issuing $15 billion-to-$16 billion in debt, which would carry an additional interest outgo), the falling dividend curve is a very real worry.
The management continues to allocate its capital towards investments into business and share repurchases. If Visa does offer the expected 59 cents a share dividend for 2016 (translating into an yield of 0.75%), it would earn the dubious distinction of being the lowest paying dividend yield stock in the Dow 30.
The Very Tight Fist
If pay-out ratios are the standard, Visa could have done much more, for a long time now.
Barring 2012 when the ratio hit 40%, it's remained in the comfortable 11%-to-18% band for the last four years. Visa's free cash flow as a share of net income has also been nearly 1, which also gives it the necessary ballast to hike dividends.
Dividend as proportion of free cash flow (FCF) is also pretty solid. In 2010, it paid $368 million as dividends while its FCF was $2.45 billion -- dividends were only 15% of the free cash flow. In 2011, dividends paid, as a percentage of FCF was 12%. In 2012, this was 13.6%. In 2013, it rose to 34%. In 2014, the number rolled back to the 15% range. In the last 12 months, this ratio is just 18%.
However, in these five years (2010 to 2014), Visa has repurchased shares worth $13 billion. Bear in mind, this happened at a time when dividend payments amounted to just about $3.2 billion.
The Slow Road Ahead
The company's management will probably continue on the share repurchasing pathway as opposed to a dividend revision.
With earnings expected to grow at 16.14% per annum in the next five years compared to 20.36% in the previous five, Visa will generate more profits even on a larger base. This is because net margins (expressed in %) have significantly improved to the mid-40s, from the high-30s. Annual capital expenditure has been in the range of $250 million-to-$500 million, translating into an increase in the FCF.
However, a low stable dividend is definitely in the cards, given Visa's track record. Visa Europe's acquisition is a massive gulp for the company - if the synergy plays out effectively it could herald a positive dividend scenario.
Given its history, expect a gradual dividend turnaround for Visa, which make it a compelling buy for investors now, ahead of the annual shopping frenzy.
Fact is, in these days of 1% CDs, it's tough to find a yield worth getting excited about. But did you know you could be investing in a publicly traded, perfectly legal investment loaded with tax breaks and delivering safe, out-of-this-world yields? I'm talking about cash cows that yield 8%, 9% and 10%. And you don't have to be a zillionaire to pull this off. You don't even have to be in a high tax bracket. Find out how you could be getting high yields, explosive growth AND tax-free income today. Click here to learn more.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.