Legendary value investor Warren Buffett (Trades, Portfolio), also known as the Oracle of Omaha, once said, "Our favorite holding period is forever."

The investment thesis on Visa Inc. (V, Financial), the largest credit card operator on the planet, could not align more with this philosophy. The company's business model revolves around steady, quasi-recurring revenue supported by an extensive global network of cardholders and merchants.

Over the years, Visa has consistently delivered impressive returns to its shareholders through dividend growth and significant share buybacks, solidifying its position as a unique blend of high returns and defensive stability since its initial public offering.

Throughout this analysis, I will delve deeper into why I believe Visa fits perfectly into the buy and hold forever mentality.

A true value investing pick

In the last decade, Visa has averaged an annual return of 18.30% compared to the S&P 500's 12.80%. Take a look at the chart below: an investment in the stock over the past 10 years would have outperformed the S&P 500 by over two times. Plus, it has been a smoother ride, with a Sharpe ratio of 0.86 versus the S&P 500's 0.72, indicating better risk-adjusted returns.

These impressive returns stem from Visa's characteristics as a top value stock.

Over the past decade, the credit card company's revenue has more than doubled, growing from $14.50 billion in 2014 to $32.60 billion in 2023. The only year Visa saw a revenue drop was 2020 due to the economic slowdown caused by Covid-19.

Visa has consistently increased its earnings per share across different economic cycles. Additionally, its long-term debt has never exceeded more than twice its annual earnings. For example, in 2023, the company had long-term debt of $20.70 billion and net income of $17.98 billion.

Source: Author

In terms of efficiency, Visa's average return on equity has been above 20% for the past decade. In 2022 and 2023, ROE reached all-time highs of 41% and 45%, respectively. Regarding return on invested capital, the company posted 30.90% in 2023, with an impressive average of 21.10% over the last 10 years.

But the big question is whether Visa will continue to sustain these robust metrics in the near future. In my opinion, all signs point to yes.

According to Visa's investor relations page, the company's growth strategy focuses on "accelerating our revenue growth in consumer payments, new flows, and value-added services, and fortifying the key foundations of our business model." Consumer payments represent a total addressable market worth trillions of dollars, where it still has significant growth opportunities through technological partnerships in areas like tap-to-pay, click-to-pay and tokenization.

Visa's net flows approach continues to grow in a market potentially worth $124 trillion in business-to-business transactions in the next four years, as well as in government-to-consumer payments.

In the second quarter of fiscal 2024, Visa reported an annual increase of 8% in payment volume, reaping the benefits of this strategy. Wall Street estimates suggest the company will grow its top line by 10.60% for the full year, with earnings per share growth of 14.30%. Despite its market dominance, the company still has avenues for further growth.

I believe Visa has established a solid network built on the trust of users and merchants. Although this trust can fluctuate, it remains the company's most valuable asset and provides its competitive advantage. With the strength of this network, it is unlikely that Visa's financial results will falter as new payment habits continue to integrate into its quasi-recurring revenue model.

Robust shareholder returns: Dividends and buybacks

At first glance, Visa's 0.80% yield might seem unappealing to investors. However, as explained in Dividend 101, the yield is a metric that illustrates the relationship between a stock's annual dividend and its current market price. Simply put, as a stock's value rises, its dividend yield decreases.

Therefore, this modest yield does not mean the company is not a dividend powerhouse.

Reviewing Visa's dividend history, which began in 2008, the dividend distribution has surged by approximately 1,900%, climbing from 10 cents to $2.08, while its share price has appreciated by 1,700% over the same period. In the past five years, the compound annual growth rate for dividends stands at a compelling 15.90%.

Visa's consistency in dividend payments is supported by its strong cash flow. Last year, Visa reported a free cash flow of $19.70 billion. A significant portion of this was returned to shareholders: about $3.75 billion was distributed as dividends (less than 20% of its FCF) and $12.3 billion went to share buybacks (about 60% of its FCF).

This use of Visa's free cash flow to reward shareholders highlights the benefits of having the stock in a portfolio.

However, every investment comes with risks. As the world's dominant player, Visa occasionally faces regulatory scrutiny as legislators worry about the credit card duopoly between it and Mastercard.

Another potential pressure point for Visa in the future is the shift toward cashless payment methods, with the rise of cryptocurrencies possibly impacting small transactions.

Valuation: Trading close to historically low multiples

Visa is not the kind of stock that trades at cheap multiples. As a high-growth dividend stock that has consistently outperformed the broader market for decades, it deserves to trade at a premium.

Therefore, the best times to buy shares are when they are trading below their historical average. With a price-earnings ratio of 30, Visa is currently trading close to its historical low multiple over the past decade. Historically, investors who bought the stock at a price-earnings ratio near 30 have done well.

Source: StockRover

When comparing Visa to its main peers and considering forward multiples that already incorporate growth estimates based on its earnings per share growth over the last three to five years, we observe Visa's stock trades at the highest PEG ratio, closely followed by MasterCard. In my view, this valuation is justified given the dominant position of these two companies, effectively acting as a duopoly in the market.

Conclusion

Visa's business model offers a relatively high level of predictability, resulting in less erratic stock performance. Despite competitive and regulatory risks, favorable macroeconomic trends continue to support its growth trajectory. The company's consistent share buybacks over the last few decades underscore its commitment to value creation.

I believe investors who have purchased strong companies like Visa, especially during periods of discounted valuation (even relative to its own history), and simply hold onto their investment for an extended period are likely to see long-term, consistent returns.