Is inflation about to rise? Amid geopolitical tensions, soaring oil prices, and persistent tariffs, many analysts and government officials are worried inflation will spike. This concerns investors, too. The relationship between inflation and equity markets is complex, but generally, stocks tend not to perform as well when prices rise, as this also leads to higher business expenses, lower consumer activity, among other problems. Thankfully, some corporations can do just fine — or even better than fine — even in such environments. One of them is Visa (NYSE: V). And not only is the financial services specialist a great stock to have in your portfolio when inflation rises, but it is also an excellent buy-and-hold forever option. Let me explain.
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Visa makes money by facilitating credit and debit card transactions through its payment network. The company charges a fee for each transaction — as a percentage of it — that runs through its system. As prices rise for any reason, even if Visa’s fees remain the same, the total dollar amount it pockets for its services increases. So, in a way, the company benefits from inflation. True, a price rise may also harm the business by dampening consumer spending and leading to fewer transactions overall. These two forces somewhat offset one another, but Visa should still perform better than most in an inflationary period.
As the company’s former CEO, Al Kelly, once said: “Historically, inflation has been positive for us.” But Visa isn’t worth investing in just because of this aspect of its business. The company leads its niche of the financial services industry, benefits from a wide moat due to network effects, and still has a massive addressable market to tap into. Visa estimates that there are still trillions in cash and check (and other types of) transactions that can be brought into its ecosystem.
Beyond that, the continued growth of the e-commerce market — where digital payment methods are a necessity — should provide an important long-term tailwind for the company. And then, there is Visa’s excellent dividend program. The company’s forward yield looks unimpressive at 0.9%. That’s lower than the 1.2% average for the S&P 500 (which is itself nothing to boast about).
