This dividend stock rolls in cash. But is it a purchase?


One of the key metrics that many investors consider when valuing a business and its stocks is its cash flow position. How much money does it have and how much free cash flow does it generate?

Generally speaking, the more liquid a company has, the more resources it will have to repay its debt, invest in its growth, maintain and increase its dividend payments.

Consider, for example, Visa (NYSE: V)Visa has been one of the best and most consistent growth stocks in the market with an average annual return of around 26% over the past 10 years. It is also a growth stock that pays a dividend. Although its dividend is yielding below average, Visa has increased its annual payout for 12 consecutive years and has enough cash to comfortably continue to grow.

Let’s take a closer look at how Visa’s cash position helps make it a growth stock that has been able to increase its dividend payouts.

Image source: Getty Images.

Visa has a lot of money

Visa is the world’s largest credit and payment card processor, and one of the two leading players in its field with MasterCard. While other companies like American Express and Discover also process credit card transactions, they follow a different business model in that they also lend money to creditors. Visa and Mastercard don’t, so they take little to no credit risk – they only charge a fee for processing payments on their extensive networks. Every time someone makes a purchase with a Visa branded credit card, Visa charges a fee, which becomes income. The business model also creates a situation of relatively low overhead and expense, resulting in huge margins and lots of cash flow.

Its operating margin – the portion of its revenue remaining after covering all expenses associated with facilitating business transactions – is 65%. A 15-20% operating margin is considered really good in many industries, so 65% is off the charts. Visa’s operating margin is also the highest among its payment processing counterparts.

Visa currently has $ 18 billion in cash and cash equivalents on the books, with approximately $ 13.3 billion in operating cash flow and $ 12.6 billion in free cash flow per year. (Operating cash flow is the amount of money that comes into the business as a result of normal operating activities, while free cash flow is the excess cash it has left after covered its operating expenses.) All of these measures have steadily increased. the last 10 years.


V given by YCharts

Now let’s look at the other side of the balance sheet – the debt.

Visa has manageable debt

Cash is the lifeblood of any business. It allows you to invest, overcome downturns, and pay off debt, among other things. Visa, as of June 30, had long-term debt of about $ 21 billion. Is it manageable, given the strength of its capital? There are several ways to measure this.

One is the current ratio, a measure intended to gauge how well a business can manage its current liabilities. A current ratio of less than 1 means that a company’s liabilities are greater than its assets, so that’s not good. Visa has a current ratio of 2, which means it can pay off twice its short-term debts. That’s a good number. This is because a number well above 2 on this metric may reflect the fact that the business in question is accumulating too much cash rather than investing in growth.

Another metric to watch out for is the debt ratio – total liabilities divided by equity. It can tell you how much a business finances its operations through debt. A high debt ratio – say, greater than 2 – suggests that a company may be using too much debt to finance its growth efforts. A ratio of less than 1 – which reflects a business using less debt and more equity to fund operations – is ideal. Visa’s debt ratio is an excellent 0.5.

In short, Visa has a lot of cash and a manageable level of debt. This combination has been one of the main reasons it has been able to show an average annual return of around 26% over the past 10 years. But it’s also a good bet for income investors.

As mentioned, Visa has increased its dividend over the past 12 years and its quarterly dividend has increased by over 1,100% since 2009. It offers a quarterly payout of $ 0.32 per share ($ 1.28 per share per year ), which at the current stock price earns $ 0.55. %. Its return is so low mainly because Visa’s stock prices have risen by about 975% over the past decade. Visa’s payout rate is approximately 22%. As dividend-paying stocks go, it’s a very manageable ratio. Income investors will appreciate the fact that Visa is not striving to pay its dividend and has the capacity to continue to increase it for years to come.

All of this makes for a great investment, whether you’re looking for dividend income, capital appreciation, or maybe a stock that offers both.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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