42% profit growth! An S&P 500 stock I’d buy right now

This S&P 500 stock has recently recorded 68% profit growth in its Q4 results. This is why I’d now add it to my portfolio.

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Visa (NYSE: V) has gone from strength to strength, and over the past five years its share price has risen 165%. Over the past year, it has also performed well, rising 15%. This has reflected the company’s resilient performance throughout the pandemic, with the acceleration towards cashless payments having given it a boost. As Visa is the largest payment processor in the world, handling nearly 165bn transactions over the last year, this has placed the company is a good position.

That 42% profit growth

Visa’s strong share price performance this year has been reflected in its results. Indeed, in the recent full-year trading update, it said Q4 net income reached $3.6bn, which was a 68% increase year-on-year. Such strong growth was partly due to last year’s resolution of a tax item, which decreased profitability slightly, yet such strong profit growth is still very impressive. Indeed, excluding all exceptional items, net income was up by the aforementioned 42%.

Over the full year, Visa also recorded net income of $12.3bn, which was a 13% increase on last year. This was driven by the increase in processed transactions, which rose 17%. 

Those recent results have helped justify why the Visa share price has risen so much. It has also been able to raise shareholder returns, and over the past year, $11.5bn has been returned in the form of dividends or share buybacks. Shareholder returns seem likely to increase further next year, especially as the quarterly cash dividend has just been increased by 17% to over 37 cents per share. Nonetheless, while the Visa share price has managed to soar over the past year, it has still underperformed many other S&P 500 stocks.

Why has Visa underperformed its index?

There are a couple of risks that must be considered in relation to Visa stock. Firstly, it’s expensive. In fact, despite its recent profit growth, its price-to-earnings ratio is still around 37. This demonstrates that growth is expected to be extremely strong, and any indication that growth is slowing will be punished severely.

Secondly, I fear that there are competition issues. Indeed, like many other S&P 500 stocks, Visa has attempted to grow through acquisitions into new markets. It has faced some difficulties recently though, as a $5.3bn deal with Plaid ran into regulation problems and was abandoned. If this becomes a regular occurrence, I don’t think that organic growth alone will be sufficient to justify Visa’s current share price. For this sake, I hope and think that this is just a one-off.

So, why would I still buy this S&P 500 stock?

While these remain risks to consider, I still think that Visa has room to grow. In an ever-increasing cashless society, Visa is a prime beneficiary. Cross-border transactions also seem likely to recover further next year. In addition, with net debt at only $2.5bn, I feel the company can continue to return more money to shareholders. This is another factor that could see the share price climb higher. Therefore, I’d happily buy this S&P 500 stock for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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