Visa Stock: Should Investors Be Rooting For a Bigger Dividend?

Chris Hill: It’s Thursday, October 18th Welcome to Market Foolery! I’m Chris Hill Joining me in studio, Jason Moser. How are you? Jason Moser: I’m doing great! How about you? Hill: I’m good! We’ve got earnings season heating Moser: We do Hill: We love this! This is our favorite time of year, and it comes four times a year Moser: You know what else we love? It doesn’t matter what time of the evening, we love a Red Sox win. That game went a little late last night. It was a heck of a game, all of it, back and forth. Pretty amazing stuff Hill: It would not surprise me if someone in the greater Boston area, or for that matter, in New England, ended up in the hospital with heart palpitations, with the way these games are going We’re going to talk Visa. We’ve got another activist fight brewing. Let’s start with your former employer, and that’s Travelers Travelers’ third quarter profit and revenue came in higher than expected. You clearly know this company much better than I do But on paper, on the surface, this looks like a really good quarter, and this looks like the most important numbers are moving in the right direction for them, which leads me to ask, why is this stock down today? And, why is it basically flat for the year? Moser: It’s anybody’s guess as to why a stock moves on any given day. You hear that buy the rumor and sell the news, whatever The stock market is generally taking a beating today anyway. To your point, I think that when you go through this release, clearly, it was a good quarter on all fronts Now, perhaps the market is thinking a little bit forward about the catastrophic losses that might come from Michael and anything else that may come down the pike Man, when I came to The Fool from Travelers back in 2010, Travelers shares were around $50 Today, we’re seeing then trading around $125, up about 150%. And, it actually recently hit a recent high of $150. So, I just like to feel like I left the company in a good place You guys are welcome. I miss you, but hey In all seriousness, I often wonder, in all of my time here — and, I have shot this across the radar before, early on in my days here — I don’t understand why this is a business that’s never been in one of our services, to be frank, because it’s a very good business. We seem to like insurers here Obviously, we latch onto Berkshire Hathaway and Markel, and Progressive is a company that gets bandied about here from time to time. Travelers, to me, is a good operator. I can tell you from my time working there, it was less about conservatism, it was more about, let’s go ahead and pay what we owe, minimize the cost on the claims side, avoid subrogation at all costs, whether it’s on the auto side or the home side or whatever. The general mentality there was, let’s pay what we owe and let’s keep this business moving forward and do right by our customers I think the benefit there is that they maintain a pretty loyal customer base. And now, we’re seeing them partnering up with Amazon, which I think is really fascinating. I don’t know that I would look for Amazon to get in the insurance game. I don’t know what they could do to be better at insurance than anyone else, other than maybe giving you insurance for a lower price, and maybe covering more But insurance is a pretty difficult bounce there I don’t suspect to see Amazon getting into that But to partner up with something like Travelers, to me, is fascinating Hill: You mentioned Markel. Markel, certainly from a stock perspective but also from a business perspective, it’s an interesting business They get into specialty insurance Some of it gets pretty esoteric. Do you think, maybe, in a small way, what works against Travelers is, there isn’t anything particularly sexy about them? That’s how I think about Travelers They’re a good operator. They’re steady-eddy There’s nothing particularly exciting about them Moser: Yeah, I think the red umbrella is probably the sexiest thing about the business Let’s be clear, I’m not saying that ought to get your motor running, either. I think your point is spot-on, it’s a very boring business They’re an insurer. They’re not doing anything terribly special. Their investment portfolio is primarily fixed income. But they do a very good job, of writing a strong book, of doing right by their customers, and that keeps those net premiums coming in. Net premiums are a good way to gauge the growth of the business, that was up 6% for the quarter, which is good I think it’s always interesting, when we look

at combined ratios to get a better idea of how they’re writing those premiums. They offer up the combined ratio, but then they offer up what they call the underlying combined ratio The underlying is essentially excluding catastrophic losses, because those are a little bit more difficult to time and understand Last year, their combined ratio was a little bit over 103%. That’s not good. We want to see that number below 100%. Combined ratio this year was 96.6%, and underlying combined ratio of 93%. That’s all to say they’re writing good business. I think that when you have a company like Travelers that continues to write good business, the business is in great financial shape, you get what we’ve seen here —  a nice, steady-eddy, boring business. But if you’ve bought and held shares of this company over the past decade, you’re feeling really good about that. Frankly, I just think there’s more of that to come Hill: Visa reports their latest quarter next week, but in the news today because Visa is hiking their quarterly dividend nearly 20% That sounds great until you look at the actual number It’s going from $0.21 a share to $0.25 a share. Look, it’s a boost. I’m sure the Visa shareholders are happy about that Does this tell you anything about what we should expect next week? Visa is a monster business It’s a $330 billion company. They’ve got the cash to hike their dividend. But in a weird way, this move raises more questions than answers for me. I look at this and I think, wait a minute. Why aren’t you hiking it more? What else could you be doing with that money? What, if anything, does this tell you? Moser: You hit the nail on the head there, it actually makes you start asking a few more questions and digging in a little bit deeper And once you dig in a little bit deeper, you come away from that thinking, what the hell? Why aren’t these guys paying me a bigger dividend or something? There’s some pretty interesting numbers behind here. I’m always happy to see the dividends of the shares that I own go up, and I’m a Visa shareholder I’m never going to turn that down. And I’m not just going to pick on Visa, because MasterCard is essentially the same here, they’re kind of in the same boat. I don’t think they’re doing enough on the dividend side, and the numbers really do bear that out, particularly when you consider the models. They generate these net margins regularly of 40% or higher They just generate buckets of cash. They have strong balance sheets, very reliable, competitive positions there When you look at the numbers alone, from 2013 through 2017 Visa spent $26.7 billion on share repurchases Then, that share count has come down That’s good, that helps juice that earnings per share number, because it brings down that share count. These companies are always going to be really valued on that EPS multiple $26.7 billion in share repurchases. Over that same stretch, they spent just under $6 billion on dividends. Considerably more of their capital is going to repurchases as opposed to dividends I don’t know that you would ever argue one of these businesses to be cheap. These are leaders in their space. Much like companies like Home Depot or McCormick, you rarely see them on sale. Then, you start asking yourself, really, what would you rather have? Would you rather have them bringing that share count down or give you the cash in the pocket? I mean, give me both, right? But perhaps you could juice the dividend a little bit more Those yields are still only 0.5% The flip side of that is, as a shareholder, I think we get to look forward to many dividend raises to come in the future. I plan on holding the shares indefinitely. But as you said, it creates a lot of questions and you come away scratching your head Hill: Also, when we’ve seen the innovation with companies like PayPal and Square, one of my questions when I was looking over their financials this morning was, why aren’t they taking a run at one of those companies? Maybe not PayPal. And I’m not saying necessarily, why aren’t they going out, sitting down with Jack Dorsey, and saying, “OK, Jack We’re 11X the size of Square. We’d like to bring you in house. How do we make this happen?” I’m not saying that. But when I see nothing but share buybacks and dividend hikes, meager as they are, I ding companies a little bit Maybe that’s unfair, but I look at that and go “Those are your two best ideas when it comes to capital allocation?” Moser: I think that’s probably is pretty fair Matt Frankel and I talked about this on Industry Focus before, we look at companies like Visa and MasterCard, compare them to PayPal and Square. The neat thing about businesses like PayPal and Square — remember, PayPal has Venmo, Xoom. It has a number of brands under

that umbrella. These are businesses that were very much built based on mobile technology and technology of today. Visa and MasterCard have been around for a long time, essentially just operate that toll booth I think that those two bigger businesses have suffered a little bit from this move towards technology. So, they’ve had to figure out ways to partner up with companies like PayPal and Square and find a new position in that value chain. So, you can fund your PayPal account with your Visa card that’s linked to your checking account, or whatever it may be Visa and MasterCard still get to play in that sandbox, but they do maintain, perhaps, a little bit of a diminished role from before PayPal is such a big company now. It’s around a $100 billion market cap, I think technically still bigger than American Express even today Square, I think, is headed down that same path For Visa and/ or MasterCard to talk about an acquisition is going to cost an arm and a leg. Plus, I don’t think those businesses are interested. And, you probably have some antitrust questions, as well. I think they’re going to continue to figure out ways to partner up with businesses like those to maintain a position in that value chain so they get something, because something is ultimately better than nothing Hill: We’ve got a fight going on at Campbell Soup, and frankly, Campbell Soup has never been more interesting. Dan Loeb from Third Point, activist investor that we’ve talked about from time to time, probably best-known in the recent past for the stake in Darden Restaurants and coming out with the note that Olive Garden needs to stop giving away so many breadsticks Moser: Was he also the one that was responsible for salting the pasta water? Hill: I think so Moser: Let’s be clear, that’s a good observation If you’re not salting that water, we have problems Hill: Here’s the thing People, myself included, have poked fun at Dan Loeb in the past for various reasons. But you go back and look at that Olive Garden literature, he was right about a lot of things Moser: Yes Hill: So now, it’s Campbell Soup Loeb and Third Point have nearly a 7% stake in Campbell Soup. The annual meeting for the company is November 29th. Loeb is looking for no less than trying to replace all 12 members of the board of directors Moser: All at once! Clean house Hill: In one fell swoop. No shrinking violet, he and his team put together a video mocking Campbell Soup. I haven’t clicked on it yet. As I said, Campbell Soup has never been more interesting You look at how challenged packaged food is, this is one of those things where I’m not rushing out to buy Campbell Soup, but I could see a bunch of people looking at Loeb’s track record — which, sure, it has some negatives. Every investor has negatives in their track record. But he’s got some positives I could see people looking at this, saying, “Oh, maybe I’ll take a whack at this.” Maybe he doesn’t replace all 12, but he agitates, he gets a few spots on the board, and they can boost this thing. Because it’s a really troubled business right now Moser: It is. It sounds like he’s probably going to have a lot of trouble doing that From what I’ve seen, it sounds like most of the family that owns stakes of the business is still against what he’s trying to do But to your point about that video, I didn’t watch the video. I saw one line he threw in there, and it made me laugh, because he’s really playing this up, it’s kind of Hollywood He’s like, “It’s time to empty the can, refresh the recipe, and restore shareholder value.” And it’s like, that’s his Threat Level Midnight moment, right? “Clean up on aisle five.” I feel like he’s really resorting to, not hyperbole, but taking it maybe a little over the top Here’s the thing, let’s assume that he gets control of this business. What do you do? I don’t know that it’s so plainly obvious They’ve been more or less passed in a lot of ways by this newfangled packaged food environment that’s out there. A lot of brands out there that resonate with younger consumers now Campbell isn’t necessarily one of them. They did make that big Snyder’s-Lance deal last year. I think that actually resulted in, they had to carry about $4.5 billion on their balance sheet, and a lot of it came from that That represents a third of the company’s total assets To me, they’re clearly challenged on the revenue side. The answer is not just as simple as, “We’re going to do this, this, and this. Empty the can, refresh the recipe, and restore shareholder value.” What does that mean?! That doesn’t mean anything, right? That’s not a plan,

that’s just a bromide I feel like he’s getting in there and trying to shake things up. I understand that, I appreciate it. Oftentimes, we see folks like this who perhaps are a little overconfident, maybe think they know a little bit more than they do I’m not a shareholder in Campbell I’m glad I’m not a shareholder in Campbell, and this does not make me want to be a shareholder in Campbell Hill: When you look back at what he did with Darden Restaurants, the parent company of Olive Garden, you could look at that and say, operationally, there are some changes that can be made. In the case of turning around Campbell Soup, I don’t see how that happens without, for lack of a better term, financial engineering I don’t see how you turn around Campbell Soup unless you make some significant changes to the cost structure of the business Moser: It could be something like a Sears story here. Maybe the answer doesn’t really exist Perhaps it is just whittling down the business and focusing on what really makes money I do appreciate his perspective, that former leadership was overpaid and didn’t deliver I think that’s spot-on. But, I think part of the problem is, the solution isn’t so easy. We talk about it all the time here on the show, that’s a tough line of work Ultimately, you really do have to focus on offering very low-cost goods. You don’t really maintain a lot of pricing power in this realm The Snyder’s-Lance acquisition, that’s right up my alley. You’re talking about chips and pretzels and peanuts, all that stuff Man, I love it. But that’s also something that doesn’t necessarily hold the same weight today Then you look at something like a Pepsi Co, which has really been able to benefit, not only from the salty snacks side, but the beverage side, as well. I think that ultimately is what this all boils down to, is consolidation in this space, in one shape or form. I think Campbell probably is headed down that road at some point or another here I don’t know that Loeb is going to have his way, ultimately. It sounds like the votes may be stacked against him Hill: To go back to something you said before and something I said before, before, when you were talking about activist investors who, if they’ve had some success, they sometimes feel like they know a little bit more than they actually do. Tie that to, Campbell Soup has never been more interesting than it is right now. And yet — I want to caution the dozens of listeners, you and I were talking about this earlier this morning — one of the ripple effects of the bull market that we’ve had is that people like Dan Loeb, people like Bill Ackman  who we talked about recently with his investment in Starbucks — activist investors and hedge fund managers who have done well in this bull market have more money to throw around. It’s one more reason for investors to do a little bit more homework I saw a note this morning about a private company hiring Goldman Sachs and JPMorgan Chase to handle their IPO. It’s a company called Beyond Meat Moser: Oh, I read about that! Hill: And one of the investors is Bill Gates You could see an investor out there saying, “Oh! Gates is investing, maybe I should take a look at it!” Well, take a close look at it, because Bill Gates has all the money in the world. This is a rounding error for him, in terms of his investments. Same thing with Loeb and Bill Ackman and other activist investors As they do well, they have more money to throw around, more opportunities to try and turn companies around. Not all of them are going to work Moser: No, they don’t. They have the ability to take on more risk. I can guarantee you that their money isn’t as important to them as yours is to you, because they have a lot more of it. That’s the first thing I always think about when I look at what these people are doing. They’re smart people — Hill: It’s situational money. Whatever Bill Gates invested in Beyond Meat is pocket change to him Moser: Exactly. Most individual investors like us, we don’t have that sort of pocket change For me, I find it always interesting to see where people have their heads at I think it’s a good reminder to not just jump in blindly and follow what other people are doing That’s not to say Loeb and Ackman and all these guys aren’t smart folks. They are, they’re very smart guys. There’s no argument there. This is not about intelligence This is about, like you said, having more money to invest in more things. So, when you have that situation, you can take some more risks Maybe you throw your money at ten different investments, and the hope is that one of them ends up paying off. I think that’s always a good reminder for individual investors like us. Don’t look to these activists as a point

of optimism. It’s interesting, learn from it, but be very careful before you decide to go following their footsteps Hill: Fun to talk about, though Moser: Yes, always! Hill: Before we wrap up, I just want to say happy birthday to my big sister! She listens to Market Foolery in the morning Friday is her birthday Moser: Happy birthday! Hill: She’ll be listening. I love you, sis! Thanks! J-Mo, thanks for being here, man! Moser: Thank you! Hill: As always, people on the program may have interest in the stocks they talk about, and they Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of Market Foolery The show is mixed by Dan Boyd. I’m Chris Hill Thanks for listening! We’ll see you on Monday!