Yahoo Finance Visa (V) Puts Funds in Escrow Account, Boosts Bottom Line
Visa Inc. V recently announced a deposit of $600 million into its litigation escrow account that had been set up under V’s retrospective responsibility plan. This plan, which was created when Visa’s shares were first put to trading on a public stock exchange, was meant to shield the company along with its Class A and Class C shareholders from any direct losses by extending a payment mechanism for judgments or settlements of certain U.S. litigation cases.
Per the terms in Visa’s U.S. retrospective responsibility plan, whenever the company will put funds in the U.S. litigation escrow account, its class B shares held exclusively by U.S. financial institutions and their associates undergo dilution in values. Dilution occurs through decreasing the conversion rate of the shares of Class B common stock to shares of Class A common stock.
Thereby, the move of depositing funds in the litigation escrow account is equivalent to the buyback of Visa’s class A common shares by reducing the conversion rate of class B stocks. This will lead to a decline, by the same amount as the deposit, in the share count of the as-converted class A common stock. As share buybacks are known to provide an upside to a company’s bottom line, the deposit amount is likely to benefit the earnings per share (EPS) of V. Over time, V has often resorted to depositing funds within its escrow account.
The latest initiative is likely to yield dual benefits for Visa, evident from reasons put forward by a senior research analyst of the well-renowned financial services provider Baird – David Koning. Firstly, it aids in increasing the balance of Visa’s litigation escrow account, which provides protection to the company and its shareholders from significant costs incurred to settle U.S. litigation cases.
Per Baird, the recent deposit will keep Visa’s litigation escrow account balance within $1.4 billion to $1.5 billion, a significant increase from $882 million recorded at the end of six months ended March 2022. Secondly, the annual EPS of Visa might be subject to less than a cent benefit, per Koning, as the latest transaction has resulted in the repurchase of around 3 million shares.
A strong cash balance and adequate cash-generating abilities enable Visa to undertake such prudent capital deployment moves. V had cash and cash equivalents of $12.3 billion as of Mar 31, 2022. Meanwhile, Visa generated cash flow from operations worth $7.7 billion during the first six months ended Mar 31, 2022, which improved 12.8% over the prior-year comparable period.
Apart from engaging in regular share buybacks, V resorts to dividend hikes, the last one being the 17.2% dividend raise approved last year. Return on equity, a profitability measure to identify how efficiently a company is utilizing its shareholders’ funds, stands at 42.9% for Visa. The figure remains higher than the industry’s average of 33.6%.
Shares of Visa have lost 7.9% year to date compared with the industry’s decline of 13.9%.
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Zacks Rank & Other Key Picks
Visa currently carries a Zacks Rank #2 (Buy). Some other top-ranked stocks in the Business Services space include Huron Consulting Group Inc. HURN, Mastercard Incorporated MA and ICF International, Inc. ICFI. While Huron Consulting currently flaunts a Zacks Rank #1 (Strong Buy), Mastercard and ICF International carry a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The bottom line of Huron Consulting outpaced estimates in each of the last four quarters, the average surprise being 29.97%. The Zacks Consensus Estimate for HURN’s 2022 earnings suggests an improvement of 22.6% from the year-ago reported figure. The same for revenues suggests year-over-year growth of 13.5%. The consensus mark for Huron Consulting’s 2022 earnings has moved 5.3% north in the past 60 days.
Mastercard’s earnings outpaced estimates in each of the trailing four quarters, the average surprise being 14.15%. The Zacks Consensus Estimate for MA’s 2022 earnings suggests an improvement of 25.2% from the year-ago reported figure. The same for revenues also suggests growth of 17.3%. The consensus mark for Mastercard’s 2022 earnings has moved 0.3% north in the past 60 days.
The bottom line of ICF International outpaced estimates in each of the last four quarters, the average surprise being 14.81%. The Zacks Consensus Estimate for ICFI’s 2022 earnings suggests an improvement of 11% from the year-ago reported figure. The same for revenues suggests growth of 11.1% from a year ago. The consensus mark for ICF International’s 2022 earnings has moved 1.9% north in the past 30 days.
Huron Consulting stock has gained 23.6% year to date. However, shares of Mastercard and ICF International have lost 13.3% and 8.2%, respectively, in the same time frame.
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