Visa’s third quarter results were broadly in line with market forecasts. Net revenue grew by 10% to $8.9bn.
Underlying net income was up 9% to $4.9bn, slower than the top line due to a 14% increase in operating costs.
Underlying card payment volume growth slowed from 8% to 7% compared to the previous quarter. Growth was stronger in international markets compared to the US, but both slowed. Cross-border payments were down from 16% to 14%. Total transaction growth slowed further in the first 21 days of the final quarter.
Free cash flow fell from $5.5bn to $4.7bn, impacted by an increase in incentives offered to corporate clients. Share buybacks and dividends totaled $5.8bn. Net debt at the quarter end including client incentive liabilities was $5.5bn.
On an underlying basis Visa continues to expect low double-digit growth in net revenue, and low-teens growth in earnings per share.
Visa shares fell by 3.2% in after hours trading.
Our view
Visa continued to grow in the third quarter, but the pace is slowing, leaving markets unimpressed.
Despite appearances, Visa isn't a 'credit card company'. It doesn't lend consumers money or run accounts, so it's not on the hook for the money if a customer defaults. Instead, Visa charges banks for transferring funds. That offers a level of protection in the face of an economic downturn, although performance will still be impacted by lower card usage.
We are monitoring the fact that nearly 50% of Visa's total volumes are US-based. Here growth is proving harder to come by than in other regions. Despite this headwind, 2024 guidance remains intact. There’s been a bigger uplift in both cross-border transactions and value-added services, as well as slowing growth in incentives paid out to key counterparties.
But we’re concerned that pulling back on incentives now could be a short-term gain that may be at the expense of growth in future periods. With the cash-to-card transition arguably complete in the US, there are relatively few levers Visa can pull to mitigate any slowdown in its largest market. Another risk to be mindful of is tightening regulation, but that’s not proving to be hugely detrimental to business for now.
Visa generated over $19bn of free cash flow last year, and looks set to achieve the same in 2024, meaning there's plenty of spare cash to go around. This surplus cash is being returned to shareholders through a combination of dividends and share buybacks. The emphasis is on the latter, meaning the prospective yield is a modest 0.9%. Remember no shareholder returns are guaranteed.
Competition from start-ups and more established rivals has become a greater risk recently. But it's not one Visa's left unchecked, and the group's been making strategic acquisitions. These are more digital-focused financial tools and could also accelerate Visa's growth outside of the US. We're supportive of Visa's efforts to deepen its offering in this area, but it’s still playing catch up with its arch-rival Mastercard.
Long-term we see payments in general as an attractive business. Visa's attractive business model means that additional transactions are virtually costless, so extra revenue turns straight into profit. But high exposure to the US is making that extra revenue hard to find. Visa's valuation is close to its long-term average but with this year’s profit growth set to be the lowest since the world emerged from the pandemic, that looks to be a little vulnerable.
Environmental, social and governance (ESG) risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Visa’s management of ESG risks is strong. Visa has a board-level committee that oversees its ESG strategy and related responsibilities and places a noticeable emphasis on ethics training. Visa has been and continues to be subject to anti-competitive related lawsuits; ongoing litigation alleges that Visa has abused its dominant market position to fix fees paid by merchants. It has implemented measures to monitor and mitigate data breaches and cyberattack. The company commits to a diverse and inclusive workplace and has implemented a target across its US workforce to increase historically underrepresented employees by 50% by 2025.
Visa key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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