My Top Dow Dividend Stock to Buy in August (and It's Not Even Close)

Visa (NYSE: V) reported third-quarter fiscal 2024 results on July 23. The results were a mixed bag, with a slight beat on earnings and a slight miss on revenue.

Despite the stock selling off a bit on Wednesday in response to the news, the Dow Jones Industrial Average component stands out as my single favorite dividend stock to buy in August. Here's why.

Image source: Getty Images.

Visa's recipe for success

A clear sense of what a company does and why you own it is essential for holding a stock through periods of volatility. Visa is one of those companies that is easy to understand because we encounter it daily. But there are a few aspects of the business that you may not be familiar with.

For starters, about two-thirds of Visa's transaction count is with debit cards, not credit cards, but credit card transactions are more profitable. Visa makes money every time a card is swiped or tapped. These are known as processed transactions, whereas the net dollar amount of transactions is known as payment volume.

The company's fee structure is divided into two categories: Service revenue, which is based on payment volume, and data processing revenue, which is based on processed transactions. Differentiating between the two revenue streams gives us better insight into Visa's results.

The way I look at it, processed transactions represent how Visa compares to other credit card companies or payment processors. In contrast, payment volume is a representation of the economy. Put another way, processed transactions are structural, and payment volume is cyclical. If Visa takes market share and customers use its cards for more transactions, that's a great sign that the business will grow in the long term. However, if payment volume goes down, that could be a sign that customers are pulling back on spending in general, which is out of Visa's control.

In addition to service and data processing revenue, Visa reports international transaction revenue -- which has been growing faster than its domestic business. To get a feel for how large each category is, consider that data processing revenue was $4.49 billion in the recent quarter, service revenue was $3.97 billion, and international was $3.19 billion. Each component of the business is extremely important. Separating each segment out showcases Visa's diversification and why U.S. consumer spending with credit cards isn't the only factor driving results.

Slowing growth

On a constant currency basis, Visa's payment volumes grew 7% in the third quarter of fiscal 2024 compared to the prior-year period (Q3 of fiscal 2023). That's slower than the 8% year-over-year (YoY) growth Visa saw in the second quarter of fiscal 2024. The same pattern occurred for processed transactions, which grew 10% YoY but had grown 11% YoY in the prior quarter. International payments grew 10%, and cross-border volumes were up 14% YoY.

The more concerning data point is U.S. payments volume, which grew just 5% YoY. On the earnings call, Visa shared that results have worsened to start the current quarter (fourth quarter of fiscal 2024), with YoY growth of just 4% in the first 21 days of July. There's no sugarcoating that this is a red flag for Visa's near-term outlook. Visa pointed to some major events like Hurricane Beryl, which affected results. Although the trend is heading in the wrong direction, it's important to remember that U.S. payments volume is merely one aspect of Visa's business.

Another blemish from the report was Asia-Pacific volumes, which rose just 0.5% year over year, with Visa citing Mainland China's macroeconomic environment as the primary reason for the slowdown. But again, if we look outside Asia-Pacific, international was quite strong, with a 16% YoY increase in Latin America, Central Europe, Middle East, Africa (CEMEA), and Europe (excluding the U.K.).

With just one quarter left to report in fiscal 2024, Visa updated its full-year outlook -- calling for low double-digit revenue growth, high single-digit to low double-digit operating expense growth, and low-teens diluted earnings per share (EPS) growth. Here's a look at Visa's results since fiscal 2020. Here's also what its results would look like for full-year fiscal 2024 if it grew revenue by 12%, operating expenses by 10%, and diluted EPS by 13%, and kept the same operating margin.

Data source: YCharts.

Zoom out, and Visa's results look excellent -- with revenue growing 67% in five years and diluted EPS nearly doubling. But if we focus on the last couple of years, there has been a noticeable slowdown in Visa's top- and bottom-line growth. The numbers aren't bad -- they're just not what investors are used to.

However, it's important to remember that an uptick in consumer goods spending during the COVID-19 pandemic's height inflated Visa's results. Plus, a wave of businesses shifted away from cash to other payment methods. Those factors likely accelerated Visa's growth in a somewhat unsustainable way.

The questions now are: What can we expect from Visa going forward, and what's a good price to pay for the stock based on those expectations?

Visa is a cash cow at a good value

Since Visa isn't growing at a breakneck pace, overpaying for the stock would be a mistake. However, Visa is a reasonable valuation based on its historical price-to-earnings (P/E) , price-to-sales (P/S) , and price-to-free cash flow (FCF) ratios.

V PE Ratio data by YCharts.

V PS Ratio data by YCharts.

V Price to Free Cash Flow data by YCharts.

In all three of these charts, the purple line (the current value) is lower than the three-year, five-year, seven-year, and 10-year medians -- indicating that Visa isn't overpriced.

FCF is critical to Visa because it uses it to support its massive capital return program. So far this fiscal year, Visa has generated $12.34 billion in FCF, bought back $10.86 billion in stock, and paid $3.18 billion in dividends.

Visa has paid and raised its dividend for 15 consecutive years . And although the stock yields just 0.8%, the dividend makes up such a small percentage of free cash flow that there's plenty of room to safely raise the payout and pull back on buybacks. If there was a juicy opportunity, Visa could also reduce or suspend buybacks to free up cash for a sizable acquisition or develop a service in-house.

Companies that generate high FCF have more wiggle room to be proactive and invest throughout the business cycle.

Visa has the makings of a core holding

At first glance, Visa's slowing growth looks concerning. But after digging deeper, it's clear that the majority of the business is doing excellently, and U.S. and China payment volumes primarily drove the slowdown.

What's more, Visa's P/E, P/S, and price-to-FCF ratios are all below historical levels -- which is a sign the stock isn't overvalued. Granted, overall growth has slowed, so Visa arguably deserves to be less of a premium-priced stock than in the past.

Still, Visa's market-leading position and compelling capital return program make it a near-perfect business. The company will continue benefiting from global economic growth and the transition toward cashless payment options. Investors looking for a stock to buy and hold forever should consider Visa now.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Visa. The Motley Fool has a disclosure policy .