Monday, July 14, 2014

What Will Visa's Dividend Look Like in Five Years?

Tim McAleenan has a new post that Visa is only expensive if you can't think 5 years ahead. Its certainly expensive on conventional metrics. Visa's P/E sits at 26, which is pretty far beyond any territory a dividend seeking investor is likely to tread. In addition, the forward yield is 0.7%. Basically it has all the markings of an easy pass.

I think there is some merit to Tim McAleenan's view that five years out things could be different. First off, Visa's payout ratio is 17%, the company has the ability to pay a much higher dividend.  Visa is debt free with 44% net margins, and has earnings per share growth averaging 24% over last three years.

So how long will it take an investor in Visa today to exceed the S&P 500 1.9% dividend yield? I used the S&P 500 average 5% average dividend growth which gets you to a 2.4% yield on cost by 2019. For Visa the assumptions are a little trickier. The company has a  38% three year dividend growth rate. Its possible that continues, but that seems a little rosy. Instead I assumed that dividends will grow more in line with earnings and so I used the 24% EPS three year average, which is still pretty optimistic.

S&P 500 Visa
2014 1.90 0.74
2015 2.00 0.92
2016 2.09 1.14
2017 2.20 1.41
2018 2.31 1.75
2019 2.42 2.17

Using those assumptions, Visa's yield on cost does not exceed the market's current yield until 2019.  Assuming the trends stay in tact, there is good news in 2020 where the S&P moves up to 2.55% and Visa passes it with 2.69. I think its pretty realistic to think that Visa can get their yield into that range in 5-6 years, but a lot depends on if they want to. Does Visa have the inclination to increase the payout ratio or will they continue to prefer buy backs?

As always these assumptions are pretty basic, but the low starting point on Visa's dividend yield mean that continuing excellent operations are required to beat the plain, old vanilla index yield. 

1 comment:

  1. I really like Visa, and plan on it becoming the first major holding in my Roth IRA. I have plans to hold it for life (currently 27), so I want it for much longer than 5 years.