Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Visa and the Value in Payments

There is a big reason why I am always writing about the payments industry and payment technology – it can generate a lot of cash. That makes some of the payment processors great value investments.

A case in point is Visa (NYSE: V) the biggest name in payment-card technology. That company reported a net income of $6.699 billion on 30 September 2017, the data posted at ycharts indicates. That income was up from $5.991 billion in September 2016.

The income was only one of a number of great numbers at Visa for 3rd Quarter 2017 that included a profit margin of 44.09%, a free cash flow of $2.572 billion, $9.208 billion in cash from operations, and $735 million in cash from investing.

Visa is making a Lot of Money

The best of these numbers from a value-investing standpoint are cash from operations and net income. Visa was able to register nearly two-thirds of the cash it was bringing in from operations as income last quarter.

That not only generates a lot of cash it also leads to a lot of excess cash or float. Visa reported $13.44 billion in cash and short-term investments on September 30, 2017. That number was nearly $5 billion more than $8.7252 billion in cash and short-term investments recorded in September 2016.

Going beyond that Visa has accrued a great deal of value. It reported assets valued at $67.98 billion on September 30, 2017. That was $3.95 billion more than the $64.03 billion worth of assets reported a year earlier. This led to an enterprise value of $261.22 billion on November 16, 2017.

Such numbers demonstrate that Visa’s payment card system is generating a vast amount of cash and accruing value. In other words; credit, debit, and gift cards pay off big time for Visa. That’s great news for long-term investors because the march of history favors credit and debit cards.

Market Sentiment is on Visa’s Side

The most valuable asset that Visa; and MasterCard (NYSE: MA), have right now is market sentiment. The available data indicates that consumers love paying with plastic and that love affair is growing.

A 2016 TSYS survey found that credit cards were the favorite payment method of 40% of American consumers, reported. The same survey found that 35% of consumers chose debit cards as their favorite payment solution, while 11% favored cash. Americans’ preference for credit cards increased by 5% between 2015 and 2016, the same survey data indicates.

Debit cards, many of which carry the Visa brand, were Americans payment of method of choice for small everyday transactions at places like gas stations, grocery stores, supermarkets, Walmart, and convenience stores. Strangely enough, preference for debit cards fell by 5% between 2015 and 2016. That percentage might reflect the growing popularity of payment apps such as Android Pay.

Actual spending told a different story than consumer preference; debit card transactions accounted for 69.5%; more than two thirds, of non-cash payments made in the United States, data from The Federal Reserve Payments Study 2016 indicates. Credit cards only accounted for 33.8% of non-cash transactions.

Mobile Wallets are not a Threat to Visa

Nor are mobile wallets such as PayPal, Apple Pay, Walmart Pay, Android Pay, Samsung Pay, and Alipay, automatically a threat to Visa’s business.

Only 16% of Americans said they had used a mobile wallet in 2015, a JPMorgan Chase survey indicates. The same survey found that only 56% of large businesses and 25% of small businesses were accepting payments from such mobile wallets.

Even such wallets become widely adopted they are not necessarily a threat to Visa because Visa balances can be accessed through most of them. Such wallets might drive more Visa use by making it even easier for consumers to pay with credit and debit-card balances.

Some observers believe that mobile wallets such as Apple Pay will actually cause people to spend; more which is good news for Visa, Etchuk reported. The thinking is that by making payment easier people will pay more. There appears to be no data to back this contention up, but the history of credit card use can be used to make a circumstantial case for this thesis.

History is on Visa’s Side

When plastic credit cards first became widely available back in the 1960s, people only used them for a handful of very select purchases. Most individuals only used the cards while traveling or at specific locations such as gas stations and department stores. Today, most people use their plastic almost everywhere they go.

History shows us that such a change in behavior might take a long time to develop. It will probably take several years for most consumers to start using smartphone payment apps on a regular basis.

This thesis is verified by the fact that PayPal (NASDAQ: PYPL) is actually considering adding a plastic Visa debit card to its popular Venmo peer to peer (P2P) payment solution, TechCrunch reported. PayPal is apparently taking that step because it would be the only way to pay with Venmo at a lot of businesses.

Venmo enables a person to send money to a friend’s Venmo account via her phone. The Venmo Visa would enable that person to pay with those funds at businesses that accept card payment, which is almost all businesses in the USA.

The Venmo Visa would be a great way to get Millennials; persons under 35 who love P2P payment, to start using plastic. Therefore it, and Venmo are win-win products for Visa.

Visa is a Great Long-Term Investment

All of these circumstances; make Visa a great long-term value investment. It is also an undervalued stock right now with a market capitalization of $252.77 billion and an enterprise value of $261.22 billion.

Visa is also a good basic stock to own, it offered shareholders a return on equity of 25.37% on 30 September 2017. There is also a 19.5¢ dividend scheduled to be paid on 16 November 2017. That dividend amount will be a 3¢ increase over the 16.5¢ Visa owners received in August 2017.

Those seeking a good value investment in payment technologies must check out Visa. It is a great brand; with a lot of growth opportunities, that might be in the right industry at the right time.