Warren Buffett is considered one of the greatest investors of all time. So when he talks, Wall Street listens.
One point he has consistently hammered home throughout his illustrious career is the importance of buying shares of companies, intending to hold on to them for a long time, preferably forever. Buffett has generally followed his own advice. His portfolio features some excellent buy-and-hold options.
One of the best is Visa (V 0.45%). The financial services giant ticks many of the boxes Warren Buffett looks for in a company. Let’s consider why Visa is an outstanding stock to own for the long term.
Visa’s business isn’t hard to understand
One of Buffett’s rules is to invest in businesses you understand. It’s a simple but important guideline. Unless you have a good command of a company’s operations, you won’t know what’s likely to drive the performance of its stock, its risk factors, etc.
The good news about Visa is that its business is fairly straightforward. It provides a payment network that connects merchants with the banks that issue credit cards, allowing transactions to run smoothly between the two.
Visa’s network supports a wide range of transactions, from credit cards to mobile payments, and the company collects a fee for each transaction. There is more to Visa. There are also critical nuances and caveats. However, the basic overview of the company’s business is within anyone’s grasp. And some good research can fill the remaining gaps.
The all-important competitive edge
Buffett also seeks to invest in corporations with strong competitive advantages, or moats. Since business success will attract competitors, only those companies that have found ways to perform well despite the competition can deliver above-average returns over the long run.
Moats can come in many forms. Visa’s stems from the network effect, or the fact that the value of its platform increases with use. Businesses aren’t obligated to accept cards that bear Visa’s logo as forms of payment. However, since billions of them are in circulation, that would amount to turning down many potential customers.
That’s a powerful incentive for companies to get on board, and the more that join Visa’s ecosystem, the more attractive it also is to consumers. The network effect in this niche is so powerful that it is basically a duopoly Visa shares with Mastercard. Further, Visa has generally kept pace with technological advances in its field.
It’s hard to see the company losing its leading position anytime soon, a significant reason why it is an excellent buy-and-hold candidate.
Dividends will boost long-term performance
Visa’s strong business has generally produced excellent financial results. Revenue, net income, and free cash flow have been on an upward path over the past decade.
V Revenue (Annual) data by YCharts
Solid financials allow businesses to reward shareholders with growing payouts if they so choose. Buffett is a fan of dividends. Reinvesting the payouts while letting the magic of compounding do its thing over the long run is an incredibly powerful strategy, and one the Oracle of Omaha loves.
Visa can provide exactly that. The company’s dividends have increased by almost 392% in the past decade, yet its payout ratio remains a modest 21.36%. Some might even argue that Visa could have afforded to raise its dividends far more than it did, given its ultra-conservative payout ratio.
Regardless, the financial services giant has room for more dividend hikes. It’s hard to see the company resorting to payout cuts in the foreseeable future. Visa’s strong dividend program is another reason it looks like an excellent forever stock.
Buy and forget
We didn’t touch on every aspect of Visa’s business, including the fact that there is plenty of room left for the company to displace cash and check transactions with digital ones, or its juicy margins. However, these three major points already make a strong case for the company.
It’s no wonder that Visa has been a regular in Buffett’s portfolio for years. The company is well-positioned to provide outsized returns to investors who buy the stock today and stay put.
Prosper Junior Bakiny 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 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.