more redemptions on deck, increased dividend

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Fourth-quarter revenue increased 23% excluding the impact of currency fluctuations to $7.8 billion, helped by the continued recovery in cross-border travel, 10% growth in payment volumes and 12% increase in transactions processed.

Underlying net income rose 16% to $4.1 billion. This was slower than the pace of revenue growth thanks mainly to an 18% increase in operating expenses.

The group purchased $2.1 billion worth of its own shares during the period, bringing the total for the year to $11.6 billion. The Board of Directors authorized a new buyback program of $12.0 billion in addition to the remaining $5.1 billion from the last buyback program.

Visa also announced a quarterly dividend of $0.45, reflecting a 20% increase.

Free cash flow increased from $3.8 billion to $5.6 billion, reflecting improved profitability. Net debt increased from $4.5 billion to $6.8 billion, primarily reflecting cash set aside for pending lawsuits and a slight increase in short-term debt.

The group expects low double-digit growth in payment volumes and transactions processed in 2023, with cross-border payments continuing to recover at a similar pace to this year. In the first quarter, Visa expects single-digit revenue growth.

Chief Financial Officer Vasant Prabhu said, “We assume stable conditions through FY23, but we are ready to act quickly if circumstances change.”

Shares were broadly flat at the start of the session.

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Our point of view

Visa has seen strong post-pandemic demand continue, and despite fears of a coming downturn, the group expects the good times to continue.

A sharp downturn could see credit defaults start to swell, but Visa is benefiting from higher credit spending without that risk looming. Despite appearances, Visa is not a “credit card company”. It does not lend money to consumers or maintain accounts, so it is not responsible for the money if a customer defaults. Instead, Visa charges banks for transferring funds.

Service revenues are billed to card issuers and are calculated based on the value of transactions. Revenue from data processing depends on the number of transactions that take place and is billed to both the customer’s bank and the receiving company. Cross-border transactions come with additional fees and currency conversion revenue.

It has always been a very attractive business model. The extra transactions cost Visa virtually nothing, so the extra revenue turns directly into profit. Capital expenditure is limited, which means that profits convert well into cash. Of course, the reverse is also true – so short-term revenue declines have a direct effect on earnings.

Net debt is easily covered by free cash flow this year, which means there is plenty of cash available. Excess cash is returned to shareholders through a combination of dividends and share buybacks. The focus is on the latter, meaning the forward-looking return is a modest 0.9%.

Competition from start-ups and more established rivals has recently become a bigger risk. But it is not a visa that is not checked.

The group has made strategic acquisitions, with the latest additions to the fold including Tink and Currencycloud. These are more digitally-focused financial tools, and we support Visa’s efforts to expand its revenue streams in this way.

Looking to the year ahead, management expects a continued recovery in cross-border travel and low single-digit growth in payment volumes and transactions processed. All of this suggests that inflationary pressures won’t derail clients’ spending plans – an optimistic outlook in our view.

However, in the long term, we see payments in general, and Visa in particular, as an attractive business. Valuation is not as demanding as in the past, partly due to inflationary concerns and their impact on future earnings. But we are always aware that short-term volatility is possible, especially if a global economic slowdown begins to impact spending.

Visa Highlights

  • Forward price/earnings ratio: 23.1
  • Ten-year average price-to-earnings ratio: 26.3
  • Forecast dividend yield (next 12 months): 0.9%

All ratios are from Refinitiv. Remember that returns are variable and are not a reliable indicator of future income. Keep in mind that key numbers shouldn’t be considered alone – it’s important to understand the big picture.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated, estimates, including forward-looking returns, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. Investments go up and down in value, so investors could suffer a loss.

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