Was Visa Added to the DJIA at Its Peak? Relevance Versus IBM and Others

Visa has replaced International Business Machines Corp. (NYSE: IBM) as the heaviest weighting in the DJIA. This makes Visa the most relevant DJIA stock based on its index weighting, due to price-weighted measurements rather than market capitalization weightings of most indexes.

News from the earnings report sounds acceptable, if you just focus on raw numbers. Unfortunately, the devil is in the details. A higher dividend and a $5 billion stock buyback plan sound great, but they are not enough to offset weak business trends.

If you ignore that a net profit drop of 28% was seen because of tax benefits a year ago, Visa reported normalized earnings of $1.85 per share. That just met earnings expectations. Operating revenue was up 9% to $2.97 billion, but that was about $50 million short of analyst expectations.

Where things get a bit murky is that Visa is facing slower growth in the key U.S. market. Domestic payment volume was 8% of global volume in September, down from 11% in August. Total payment volume was up 13% to $1.1 trillion in the latest quarter.

The same trends for Visa are likely true for rival MasterCard Inc. (NYSE: MA) as well. So why is MasterCard actually trading up? Visa signaled constant dollar revenue growth in the low double-digits, with foreign exchange taking out another 2% for the next year. Unfortunately, that is slightly worse than what it projected just in June.

Again, it seems as though Visa’s addition into the DJIA may have signaled at least a near-term peak. The stock was up about 35% so far on a year-to-date basis, and that is well above the solid gains in the S&P 500 index and in the DJIA.

Visa shares were down 3.6% at $196.40 in early Thursday trading, in a 52-week range of $138.53 to $205.25. Its market cap is more than $126 billion, even after this big drop. The consensus analyst price target is about $214 for the shares over the next year.

To show just how important Visa is to the DJIA now, IBM’s recent price drop put its weighting at 7.4% of the DJIA, versus Visa’s 8.38%. IBM shares seem to have found a bottom near-term in the mid $170s, and the stock is now back up to $180 after news of an increased stock buyback.

MasterCard shares were up 0.5% at $729.40, against a 52-week range of $453.57 to $737.83. Its market cap is about $88 billion, and the stock is $2 or so above the consensus analyst price target.

Another consideration is rival American Express Co. (NYSE: AXP), which is a DJIA stock as well and has been since the 1980s. Visa’s share price is about 2.4 times that of American Express, and that gives American Express a DJIA weighting of only about 3.4% because of its $82 price now. That $82 share price is also a few pennies above the consensus analyst price target.