How to understand this visa cash flow section for 2019?

Question

I am forcing myself not to skip over the numbers section in an annual report. But as usual, I get bamboozled how to interpret the numbers.

Here is the cash flow section. Can anyone answer the following questions?

Remember, I am not trying to assess this stock, I am using it to get comfortable with this section that is in all annual reports where I can eventually form my own opinion of a given company. Right now I feel that I am too superficial in my analysis.

1. Based on the numbers, I am interpreting that Visa is not doing well or at least had a bad year (despite that their stock went up nicely in that year). I am not saying that I am an expert. I am trying to form an educated opinion so if I am missing anything please share.

2. They offer explanations why the numbers went up or down. How to receive it? Is it an attempt to explain bad numbers in the best possible way or is it legit?

3. Overall what would be the correct takeaway when seeing such numbers?

Answer 1

You can't necessarily judge performance just by the cash flow statement alone - you have to look at other statements to get a complete picture.

A quick summary of each section is:

• Operating: Cash used to operate the business (revenues, expenses, etc.)
• Investing: Cash used to grow the business (buying assets, other investments)
• Financing: Cash raised for the business (borrowed, sold equity, etc.)

So no one is bad in isolation - they each could be good or bad depending on the context and what the cash is used for.

Here's my take on their explanations with a general judgment:

Operating: Growth (good) was somewhat offset by higher legal and tax expenses (bad)

Investing: less losses on sales of investing securities (need more detail on what these are to make a judgment, but it's not a large contribution to cash flow)

Financing: This may be where you think there's a problem, but their explanation is that the cash went to buy back shares and pay dividends which is generally good for equity holders in the sense that they have plenty of cash to distribute back. In reality, buybacks and dividends have a zero effect on shareholder wealth but it's usually a good indication of solvency and stability.

I don't see any huge red flags in that statement. Certainly stock buybacks have shown to be risky for other companies this year (less cash to weather a downturn), but in "normal" circumstances it's generally viewed as a positive move.

Answer 2

I'll be a bit more blunt: Visa made $12B last year, and then gave about $10B of it back to their investors in dividends and stock purchases, it seems. That money left Visa, but it didn't leave for bad reasons: it is the reason why the stock went up (stock repurchases drive the price up).

See for example this Kiplinger article mentioning that Visa has bought back 20% of its shares in the last 5 years ($32B worth), and had a $8B buyback program in 2019. That's very investor-positive. It may or may not mean the company will do well in the future - United also had a large number of share buybacks, for example, and I wouldn't touch their stock with a ten foot pole - but that money wasn't lost, it was given back to the shareholders.

The cash flow is an issue of that first line - operating income - is negative, or if the financing line is more related to loans than it is here.