Visa Stock Is Great. Here’s Why You Shouldn’t Buy It.

Visa (NYSE:V) is a well-run company. It’s understandable that many investors might want to own shares. But even great companies aren’t right for every investor, and that’s certainly true of Visa.

Let’s take a closer look at why Visa stock is interesting today and why, while it is an attractive investment, some investors may want to avoid it.

Visa is great in many ways

One of the biggest reasons to like Visa is that it’s a leader in an emerging industry. Payment processing is becoming increasingly important as consumers move away from cash. With established technology, a trusted and widely recognized brand, and the scale to continue investing in both technology and industry reach, it would be hard for a newcomer to topple Visa.

Image source: Getty Images.

Fair enough, even though Visa is a financial giant, it shares its dominance with MasterCard (NYSE:MA) creating an effective duopoly. But that hasn’t stopped Visa from achieving truly incredible growth numbers.

For example, Visa has grown its top line by 10% year-over-year over the past decade. That translated to 15% year-over-year earnings growth over the same period. Both are very impressive numbers.

Another positive aspect is that Visa has made sure to reward investors with regular dividend increases. The annual streak lasts up to 16 years, with an annual growth rate of 18% over the past decade. This rate of dividend increases is nothing short of phenomenal for any company over such a long period of time.

But this is where it gets tricky.

Some investors will be better off avoiding Visa

Despite its impressive dividend growth history, Visa’s dividend yield is just 0.75%. This is very low, even lower than S&P500a meager 1.3% average yield. That will likely be too little for many dividend investors. If you want to live off the income your portfolio generates, Visa probably won’t be a good fit for your portfolio.

V data by YCharts

That said, profitability is at the high end of the company’s historical profitability range. And its price-to-sales and price-to-earnings ratios are below their five-year averages. All three are signs that Visa stock is attractively valued, or at least reasonably valued, today.

However, the stock is only trading about 5% off its all-time high, so even though the key valuation metrics seem attractive, it’s hard to suggest that Visa isn’t a popular stock among investors. In fact, it’s not uncommon for the stock to experience declines of 15% or more. So the current price, while somewhat attractive, may not entice die-hard value investors.

V data by YCharts

It is worth noting two more negative issues that have a greater impact on business.

First, there is significant risk associated with Visa’s headlines. Because of the effective duopoly it operates in, it regularly faces pushback from customers and regulators over its business practices. This can lead to legal battles, legal fees, and government fines. It is highly unlikely that this aspect of Visa’s business will change anytime soon, so if you like boring companies that don’t make the news, Visa is not one for your portfolio.

Second, Visa’s business is driven by transaction volume. The more people use its cards, the more money it makes. But transaction volumes fall during recessions. Although Visa’s stock wasn’t publicly traded during the Great Recession, it fell sharply during the recession that began with the coronavirus pandemic.

And with good reason. Profits fell 22% year over year in the third quarter of 2020 and 23% in the fourth quarter of this year. Profits have certainly rebounded, but the impact of the recession should not be underestimated if you are a conservative investor, as sharp declines in profits often lead to sharp declines in stock prices. That could make it much harder for many people to sleep soundly at night.

Make sure you want a Visa

There’s nothing wrong with buying Visa stock. In fact, based on historical valuation trends, it looks like it could be trading at a pretty attractive price. However, every investment comes with trade-offs, and this one is no different. If you’re looking for income, prefer value stocks, or have a problem with headline risk and economic risk, it’s probably best to avoid Visa stock.

Is it worth investing $1000 in Visa now?

Before you buy Visa stock, consider the following:

This Motley Fool Stock Advisor a team of analysts have just identified what they believe is Top 10 Stocks for investors to buy now… and Visa wasn’t one of them. The 10 stocks that made the cut could deliver monster gains in the years to come.

Consider when Nvidia We created this list on April 15, 2005. If you invested $1,000 at the time of our recommendation, you would have $662,392!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio-building tips, regular analyst updates, and two new stock picks each month. Stock Advisor the service has more than four times S&P 500 return since 2002*.

See 10 actions »

*Stock Advisor Returns as of September 9, 2024

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 call options on Mastercard and short January 2025 $380 call options on Mastercard. The Motley Fool has a disclosure policy.