Since Warren Buffett took over as Chairman and CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) in 1965, he transformed it from an obscure textile company into a giant of the corporate world.
Berkshire Hathaway’s market capitalization of $692 billion makes it the seventh largest publicly traded company in the world. Buffett’s knack for picking high-quality stocks is what makes it worth considering whether some of his holdings might fit in your portfolio.
Visa (NYSE:V), the world’s most dominant payment processor, ranks 19th in Berkshire Hathaway’s portfolio, with a current value of $1.8 billion. But should you make it part of your portfolio? Let’s look at the fundamentals and valuation of fintech stocks to answer this question.
Visa is a well-oiled machine
When Visa released its fiscal first quarter results on Jan. 27, the report showed the company beat analysts’ estimates for non-GAAP (adjusted) earnings and diluted earnings per share (EPS).
Visa reported net revenue of $7.06 billion in the quarter ended Dec. 31, up 24.1% from the same period a year earlier. That easily topped analysts’ average revenue forecast of $6.79 billion.
The company beat analyst consensus on net revenue for the eighth quarter of the last 10 thanks to strong performance across all areas of payments volumes, payment transactions and cross-border volumes.
Payments volumes (the total dollar amount of transactions Visa’s networks helped process) grew 19.8% year-over-year to $2.97 trillion in the first quarter.
Payment transactions (the total number of transactions the company helped complete) jumped 20.8% year-over-year to 62.30 billion in the first quarter.
And cross-border volumes (the volume of payments when a Visa card’s issuing country differs from the merchant country) soared 37% in the first quarter.
Growth has been helped as many countries reopened their borders to tourists last October and November, according to opening remarks from chief financial officer Vasant Prabhu during the company’s recent earnings call.
Visa’s adjusted diluted EPS rose 27.5% year over year to $1.81 in the quarter, beating analysts’ forecast of $1.70.
How did Visa outperform analysts’ adjusted diluted EPS expectations for the ninth of the last 10 quarters? Along with Visa’s significantly higher net revenue base, the answer lies in the company’s non-GAAP net margin, which increased 30 basis points year-over-year to 55.3% in first trimester. In other words, the company converted $0.55 of every dollar of sales into profit. Of the dozens of companies I follow, this is the highest that comes to mind.
And thanks to Visa’s enormous scale and willingness to adapt to new payment technologies, analysts predict the company will generate 18% annual earnings growth over the next five years.
The dividend is a bonus
Visa is a fundamentally sound company, but what makes the stock even more attractive is its rapidly growing dividend.
Its dividend payout ratio in its prior fiscal year was 21.7%, and since the company’s business requires minimal capital outlay to operate, that leaves it with a ton of flexibility to leverage its 14-year run. dividend increases. This is why I expect yearly dividend growth in the percentages of mid to late teens for the foreseeable future.
The combination of sound fundamentals and Visa’s low payout ratio is why the company’s board was confident enough to raise the payout by 17.2% last October. While Visa’s 0.7% dividend yield is about half the S&P500of 1.5%, the potential for dividend growth more than offsets the lower yield.
A great deal at a fair price
Visa is a high-quality fundamental-based stock. And it doesn’t seem to be getting the recognition it deserves either.
The price-to-earnings ratio based on earnings estimates for this year is 31 at the current share price of $219. Considering its potential for annual earnings growth as a percentage of teens, this is a reasonable valuation for a stock of Visa’s quality. The dividend yield of 0.7% is also a bit above its 13-year median yield of 0.6%, which also supports the idea that Visa is a solid buy right now.
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Kody Kester owns Visa. The Motley Fool owns and recommends Berkshire Hathaway (B shares) and Visa. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.