Leave Visa in the Dow, Not Your Portfolio

 | Sep 23, 2013 | 12:00 PM EDT
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Congratulations go to Visa (V) for being named one of the 30 members of the Dow Jones Industrial Average last week.

On that news, Visa jumped more than 2% on Friday while the overall market was down. Joining the Dow industrials is a prestigious step, deserving of celebration.  But I don't recommend adding Visa to your portfolio.

Visa shares sell for more than 10x revenue. That's about 5x the price-to-revenue multiple for International Business Machines (IBM), and close to 3x the multiple for Microsoft (MSFT).

The price- to-book value ratio for Visa is 4.6. That's about double the price-to-book ratio for Exxon Mobil (XOM). And the price-to-earnings ratio for Visa is 24. That's double the P/E for Apple (AAPL).

As a value investor, I avoid stocks selling for such fat multiples. But suppose you are a growth investor. Does Visa have enough growth and profitability to justify its hefty valuation? I don't believe so.

Granted, Visa enjoys fat profit margins, about 47% last year. But other measures are good rather than great. Here is a comparison with the four companies mentioned above.


Return on Equity



Exxon Mobil


International Business Machines






Visa has the lowest return-on-equity figure of the five, even though it is more expensive, by various measures, than they are.

In the fiscal year that ended June 30, 2013, Visa earned just under $27 billion. Two fiscal years earlier, in FY2011, it earned just over $27 billion.  That doesn't sound like a growth stock deserving a premium valuation.

According to consensus thinking, we are entering a period of rising interest rates. And for once, I think the consensus is right.  Will that help Visa or hurt it?  It seems to me that it will hurt it, by making consumers slightly more reluctant to use their credit and debit cards.

Is Visa a good company? Yes. Is it a good stock, in my view? At the moment, no! 

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