Recent Purchase of V

I’ve been eyeing Visa (V) for quite some time now. It generates a lot of free cash flow and has posted a CAGR of 13.6% in terms of revenues since FY08 (1). Together, Visa and MasterCard (MA) have essentially a duopoly on the worldwide credit card market. There are approximately 30 million stores worldwide accepting Visa and 22 million accepting MasterCard (2). Discover and American Express are the other two largest but have higher transaction costs and also, as lenders, bear some of the risks of a credit default. Visa, on the other hand, takes on no added risk. It makes money in the form of the merchant fee every time the card holder swipes his or her card. Visa has a large (and growing) global presence. I personally rarely use cash and pay for everything with one of my Visa cards. As the United States and the rest of the world continue to transition to a cashless society, Visa is very well positioned to capture a large chunk of those profits.

Currently, Visa is not much a dividend stock. It does pay an annual dividend of $1.32, which may seem like a lot but with a current stock price of around $180, that comes out to about 0.73% (yes, there is a zero in front of there). However, this is largely due to Visa being a growth stock. It’s 52-week range has been from 114.26 to 184.90 (6/12/2012-6/12/2013). And, it was at around 74 two years ago! (Past results are not indicative of future results.) The dividend yield has remained fairly constant at around 0.7-0.8% over the last few years. Since Visa stock has been growing so fast, the dividend increases have basically kept the rate stable.

Since my investing philosophy involves buying high-quality dividend paying stocks, Visa may not seem like the ideal candidate. And, for people needing the income today, it is not a great choice. However, my time frame is on the order of 25-30 years. I am almost 30 years old and do not need the income or capital gains that I’m hoping this stock will generate. I’m not buying Visa for the dividend today but for the capital appreciation and, more importantly, its high dividend growth rate. Visa has an estimated 3-5 year EPS growth of 18.6% and a 3 year dividend growth of 28.0%. It will not be able to sustain this high of a dividend growth rate but, as the company and market matures, in say 10 years, they would be well-positioned to continue to return money to shareholders in the form of share buybacks or dividends at rates more along the lines of the consumer bellwethers, like Coca Cola, Proctor & Gamble, or Kimberly Clark. In 25-30 years I’m expecting my yield on cost to be substantial. In the future I might choose to then take the distributions as cash and distribute them elsewhere, but right now I’m reinvesting them back into the companies that pay them.

On 6/11/2013, I bought 15 shares of Visa Inc. I wish I would have bought it today (after a few days of market drop), but I am going to be holding this for the long run so won’t worry too much about the very slight discount I could have gotten today. This will only add $19.80 to my annual dividend. (It will be fun to watch this as the dividend grows!) My average dividend yield is now 2.95%, which is decreased since Visa’s low yield averages it down. Estimated annual dividend is now $1038, above my target level of $1000 for the year 2013. I continue to expect the annual dividend amount to increase as more capital is added. I will have to aggressively invest in the remaining months because I had missed out on some of the early year dividends from my other stocks.

Visa was bought within my taxable brokerage account. The only taxes I will pay will be on the small dividends that this generates. I plan on holding on to the unrealized gains until I retire. I was not able to put this into my Roth IRA because total 2013 contributions were already up to $4,200 out a maximum of $5,500. To reduce losses due to commissions, I want to purchase a little more than the $1,300 I have left in my Roth IRA.

My entire portfolio is here.

Sources:
(1) Seeking Alpha: Visa Offers Promising Growth In The Future
(2) The Motley Fool: Visa And MasterCard Seem Destined For Greatness

Full disclosure: Long V