1 Long-Term Investment You Can Get Charged Up About
May 5th 2013 6:00PM
Updated May 6th 2013 1:05AM
There aren't many companies that offer investors the ability for share price appreciation in nearly any growth environment. There are plenty of smart conservative choices like Coca-Cola and Procter & Gamble, whose products are sold globally and whose volumes dip very minimally if the global economy turns south. However, the downside to this is they're generally slow-growth companies, so price appreciation will often be minimal.
On the flipside, if investors go after growth companies like Facebook, they could take advantage of rapid revenue growth at the expense of a steady dividend, but they run the risk of a train wreck if spending slows.
And then there's payment processing company Visa , perhaps one of the very few long-term investments you can get charged up about that combines the potential for rapid growth with consistency in nearly all economic environments. The way I see it, Visa has five opportunities that put it at the head of the class.
The comparative advantage
First, what makes Visa, and its closest competitor MasterCard , two genius plays in the payment processing sector is their absolution from doubtful accounts. Visa and MasterCard are payment processing facilitators. Period! Peers Discover Financial Services and American Express serve as both payment processors and lenders, giving them the unique ability to double-dip on profits. However, this also exposes these two companies to doubtful collections for those who don't pay their debts. During the recession, these doubtful accounts crushed the share prices of Discover and American Express. As for Visa and MasterCard, no lending ability means they'll never worry about doubtful account provisions.
Breaking down borders
Second, international markets are a screaming opportunity for Visa. According to Martina Hund-Mejean, the CFO of MasterCard, approximately 85% of all transactions are still being done in cash around the globe. This gives Visa ample opportunity to grow for literally the next couple of decades. In its second-quarter report released last week, Visa delivered cross-border volume growth of 10% on a constant-dollar basis -- and this is just the tip of the iceberg.
A big opportunity in the prepaid market
A move into prepaid debit cards is another area where Visa will look to excel in the coming years. With plenty of consumers' credit tarnished from the financial crisis, debit cards are the only viable non-cash option. According to a Federal Reserve payment study conducted in 2010, debit card usage grew by 15% annually between 2006 and 2009, so this market, especially overseas, is far from saturated.
It also might make sense for Visa to pick up one of the small but established names in the prepaid card sector, such as Green Dot . Green Dot is in the process of diversifying the number of retailers it's partnered with -- as it used to be skewed heavily toward Wal-Mart -- but will find the going tough if it needs to use its $358 million in net cash to promote its brand against the likes of American Express and MasterCard. With NetSpend agreeing to be purchased by Global Payments, I see Green Dot putting up the "For Sale" yard sign as the next logical step.
People buy what they know
Fourth, Visa was ranked as the 74th-most valuable brand, according to Interbrand's 2012 list of the top global brands. What this means as a Visa shareholder is that the company's brand image alone can drive investments into the stock. People want to own companies they're familiar with and that they recognize, adding another reason Visa is a great candidate over the long run.
Shareholder payback is growing
Finally, Visa is offering a significant payback for investors -- even beyond the 125% share-price appreciation seen over the trailing five-year period. In just its most recent quarter, Visa repurchased 12 million shares of its own stock and still has $1 billion remaining in its stock repurchase program. Although share repurchases don't return money directly to shareholders, they can make a company appear cheaper on an earnings basis, since there are fewer shares outstanding to divide profits into.
In addition, Visa has raised its quarterly payout in each of the past four years by a cumulative total of 214%! Despite yielding just 0.8%, I think we're seeing the beginning of a transformation throughout much of the credit services sector of these stocks becoming dividend juggernauts. With a payout ratio of just 18%, there's certainly plenty of room for Visa to bump its dividend even higher without hampering its ability to expand into emerging markets, improve its network, or make acquisitions.
Are you charged up yet?
My suggestion is that you don't let yourself be skewed by Visa's high share price. With the amount of emerging-market opportunity yet to be tapped, and domestic and international prepaid cards beginning to take off in popularity, there's no reason Visa can't continue to grow by low double-digits for years to come. This is the epitome of a set-it-and-forget-it kind of investment that could singlehandedly charge up your portfolio!
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The article 1 Long-Term Investment You Can Get Charged Up About originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Facebook and MasterCard and recommends American Express, Coca-Cola, Facebook, MasterCard, Procter & Gamble, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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