Introduction
Visa (V -0.65%) recently reported net revenue of $8.1 billion and diluted earnings per share of $2 for the third quarter of 2023, ending on June 30. Both of these headline figures marked double-digit year-over-year growth. It’s a common sight for this financial juggernaut, with investors becoming accustomed to its consistent performance, irrespective of economic conditions.
Yet, the true story behind Visa’s success isn’t solely encapsulated by these metrics. What truly stands out is the 62% operating margin the company achieved in its latest quarter. This remarkable figure underscores why Visa is often regarded as one of the world’s premier financial institutions.
The Remarkable Profitability
Visa’s 62% operating margin serves as a testament to its extraordinary success and profitability. Few companies can match such financial prowess. The ability to generate positive net income is crucial as it signifies financial stability, reducing reliance on capital markets for survival. While this aspect may have been overlooked in the past, the current higher-interest-rate environment emphasizes the significance of profitability.
Visa’s recent performance is striking because, despite a 12% increase in net revenue, operating expenses actually decreased compared to the previous year. This suggests inherent operating leverage within Visa’s business model, a concept we’ll explore further below.
This substantial operating margin has translated into consistent free cash flow, reaching $18 billion in fiscal 2022. Consequently, Visa has rewarded shareholders with a dividend yield of 0.74%. While not eye-popping, it’s noteworthy that Visa has consistently increased its quarterly dividend since its 2008 IPO. Moreover, with a payout ratio below 25%, there’s ample room for future dividend growth.
Additionally, Visa regularly conducts share buybacks, having spent $8.4 billion on buybacks in the first nine months of fiscal 2023. This not only bolsters existing investors’ ownership but also provides support for the stock price.
Capitalizing on Scale
Visa’s exceptional profitability owes much to its commanding position in the industry. According to Statista, Visa handles a staggering 61% of all credit card transactions in the United States, with a still-impressive global market share of 39%.
In the first nine months of fiscal 2023, Visa processed a whopping $11 trillion in payment volume. Notably, cross-border transactions have been outpacing overall growth in recent quarters.
Furthermore, Visa boasts an astounding 4.1 billion branded cards in circulation. This massive number is a testament to the company’s collaboration with major financial institutions such as JPMorgan Chase, Bank of America, and Capital One. This broad distribution network facilitates Visa’s access to consumers’ wallets and increases the frequency of card usage.
Consumers have embraced Visa’s cards due to the myriad of perks and benefits they offer, indicating strong demand despite prevailing economic uncertainties. These figures underscore Visa’s extensive reach and scale, clarifying why the company enjoys such remarkable financial success. The existing infrastructure for transaction authorization and settlement, coupled with additional transactions carrying high margins, has consistently driven exceptional profitability.
Comparing the current 62% operating margin to the 55% margin from the fiscal 2018 third quarter underscores the advantages of Visa’s ongoing scale expansion.
Visa’s ability to consistently generate substantial net income should firmly place this stock on investors’ watchlists.
