3 Reasons Visa Inc. Stock Could Rise

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In the past year, shares of Visa have barely budged, rising just 11% compared to the nearly 17% price return of the S&P 500 index .

Visa's recent underperformance could change after it reports fourth-quarter earnings. Here are three reasons why:

1. A simple reversion to the mean
One big-line item has stood out at Visa and MasterCard : cross-border transactions. Those who tuned in to the company's previous conference call (click here for a summary) heard analysts bombard Visa executives about the company's cross-border haul.

Visa has experienced a notable decline in growth in cross-border revenue. Transaction volume grew 6% year over year last quarter, while revenue rose only 1%. Meanwhile, at MasterCard, cross-border grew 16% by volume, with fees from those transactions growing 14% over the year-ago period.

Visa executives attribute the slowdown in growth to lower currency volatility (volatility is part of the equation for calculating translation fees from one currency to another). MasterCard attributes its success to its focus on promoting its platform as an ideal, cross-border processor.

In any event, cross-border transactions are not only some of the most profitable, but also the most indicative of the payment network's competitive strength. Improving them would be a massive win for Visa.

2. Incentive spending gives room for upside
Incentives are taking a larger slice of the revenue pie for processors, tallying to roughly 16% of Visa's revenue in recent years.

Visa guided for full-year incentive spending equal to 17% of revenue, pointing out that this would, mathematically, imply incentive spending of 19% of revenue in the fourth quarter. Jumps like this are rare. But it's for good reason. Visa noted that one-time costs associated with contract negotiations would flow through the income statement in the fourth quarter, even though the expenses are for multi-year contracts.

Of course, this also gives Visa plenty of wiggle room to score a slam dunk with investors by recording outsized revenue (reducing incentive spending as a percentage of all revenue), or by recording lower than expected incentive spending in the fourth quarter.

Additionally, Visa's management declined to comment on which contracts were up for renegotiation this quarter, but in revealing them in the fourth quarter, Visa has plenty of opportunity to surprise investors.

As one would imagine, locking in some of its biggest issuers into favorable, long-term agreements is certainly favorable for Visa.

3. Buybacks and dividends -- cash in your pocket!
Long-time Visa shareholders know that the fourth quarter is when the party starts. The company reveals contracts signed in the past year, earnings and cash flow guidance for the next year, as well as plans for share repurchases and dividends.

Visa is a bonafide dividend growth stock of the future. Since going public, the company has increased its dividends year after year. (Last year, Visa approved a 21% increase in its quarterly dividend.) In most years, though, repurchases trump dividend payments, and 2015 should be no exception.

Given that shares trade only about 5% higher than at the time of the last announcement -- and at a valuation of only 21 times forward earnings despite three-year average net income growth of 19% -- a multibillion dollar repurchase plan is likely in store for 2015. With one year of growth behind the company, and shares trading only a few percentage points higher than at the last announcement, another billion-dollar buyback is undoubtedly in the cards. After all, Visa has one of the best problems any company could have: it generates far more cash than it could ever reinvest in the business. 

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The article 3 Reasons Visa Inc. Stock Could Rise originally appeared on Fool.com.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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