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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (247)  | Author's Website |

Western Union a Buy on MoneyGram Weakness

Western Union trades at a great valuation with a high dividend. MoneyGram is losing market share and loaded with debt. The barriers to entry into cash exchange are high

March 06, 2020 | About:

The Western Union Co. (NYSE:WU) is a buy because it’s about the only way to send cash to some countries and its biggest competitor, MoneyGram International Inc. (NASDAQ:MGI), isn’t doing well. Profit margins are high, the stock is cheap, the dividend yield is high and the company plans on doing more share buybacks.

The stock trades for $23.91, there are 413.12 million shares and the market cap is $9.9 million. Earnings per share are $2.47, so the price-earnings ratio is 9.68. The dividend is 80 cents and the dividend yield is 3.34%. This is cheap compared to the S&P 500, which sports a price-earnings ratio of 22.6 and dividend yield of 1.85%.

Sales have been lackluster over the past several years. Revenues were $5.438 billion in 2015 and $5.292 billion in 2019. Net income grew from $837.8 million to $1.05 billion over that time frame, so management has controlled costs. What’s incredibly impressive is that shares outstanding have shrunk from 512.6 million to 427.6 million over the same period. It shows in earnings per share, which have increased from $1.63 to $2.47. The company plans to have $2.5 billion to $3 billion in dividends and buybacks from 2020 to 2022.

The balance sheet shows $1.45 billion in cash to $528 million in payables and $3.3 billion in debt, which is strong. I was hoping to find some bonds when the financial markets crashed recently, but none were to be found (at the yield I was hoping for). Cash flow from operations were $914.6 million and capital expenditures were only $48.1 million. It’s amazing how small capital expenditure is for Western Union. It doesn’t take a lot of money to get pumped back into property, plant and equipment. Free cash flow is $866.5 million, so the free cash flow yield is 8.75%. That’s an incredible free cash flow.

Western Union's business works like this. An indivdual takes cash or their debit card into a local grocery store, fills out where they want to send the money and the other person picks it up at a place that has Western Union where they live. In some countries, it’s not as prevalent as in the U.S., so the receiver may have to go to a local bank.

What galls me about Western Union is it usually charges about $8. So on $100, that’s 8%. You might be asking yourself why not use a modern program such as PayPal (NASDAQ:PYPL), Google Wallet, Venmo or Dwolla? Well, you can. But these services don’t always work in other countries. Also, the receiver has to have a bank account. Therefore, you can’t use many of these services. So Western Union is still the only choice and you have to pay their ridiculous fee.

I lost my wallet once in Brazil and had to have some cash sent to me. It came through MoneyGram, which is similar to Western Union. To hold cash in Brazil, you have to have a fortified building: guards, bullet-proof windows, etc. My bank account didn’t do me any good because I had lost all of my cards.

In regards to competition, I doubt if anyone wants to go into the thousands of grocery stores in the U.S. and compete against Western Union. Why would you? It’s a duplication of efforts. If cost is an issue, then Western Union will simply drop its prices. I see the company's services are available at Walgreens (NASDAQ:WBA), Dollar General (NYSE:DG) and 7-11. That’s about as ubiquitous as it gets in the U.S. According to the company, the majority of the world’s population lives within three miles of one of its locations.

I would have never considered Western Union if not for an interview of IVA Funds' Charles de Lardemelle, who noted that app users have to have a bank account, which is not required for Western Union. He also noted that Ebit margins are 23%. Western Union is signing up new banks all over the world, has 550,000 connection points, spends $200 million a year on compliance (which other companies can’t do) and the average transaction is $300. What sold me though is that de Lardemelle pointed out how poorly MoneyGram is doing.

MoneyGram’s stock is trading at $2.12 (which doesn’t engender confidence) and has a mountain of debt. Revenues have done poorly, falling from $1.53 billion in 2015 to $1.23 billion last year. The balance sheet shows $146 million in cash to $206 million in payables and $850 million in debt. No thanks! Too much debt and sales are falling. Free cash flow has been mediocre over that last several years as well.

The company offers its services in conjunction with Walmart Inc. (NYSE:WMT). According to a recent filing with the Securities and Exchange Commission, “On Nov. 4, 2019, Walmart announced that the white-label money transfer service would now be joined by other brands in becoming part of a marketplace of money transfer services at Walmart stores across the U.S.” The 10K went on to state, “The lower price point of the white-label service has negatively impacted our revenue and operating income in 2019.” In other words, Walmart is taking a big chunk of the profits. No surprise there. It appears that Western Union is lucky that it’s not dependent upon Walmart like MoneyGram is.

I looked to see what it would cost to send $300 through MoneyGram at Walmart. It only costs $5. That’s quite a bit less than what Western Union charges. For Western Union, the fee is $9. Plus, MoneyGram gives you a much better exchange rate. That’s a big deal too.

What’s ironic is that we’re shareholders of Western Union, but through my research, I’d rather be a customer of MoneyGram. Its fees and exchange rates are much better. As a shareholder, Western Union has high barriers to entry. The thousands of locations around the world have no incentive to allow a competitor. Plus, they are making lots of money off of Western Union. The sending and receiving companies receive part of the fee.

S&P has a price target of $29. This is based upon the stock trading at a price-earnings ratio of 14.6 using 2020 earnings. I could live with that target and agree with it. Revenues could very well be flat for a while, but the valuation, dividend, profit margins and share buybacks make the stock so compelling.

Now let’s talk about the risks. The biggest risk is the markets keep falling and the coronavirus has an enormous effect upon the economy. We all get that. Another is that the U.S. economy gets soft and people cannot send as much money overseas.

I don’t see the phone apps being competition just yet. You still have to have a bank account and billions of people across the globe do not. I’ve tried those phone apps before and, oftentimes, they don’t sync with your bank account. Syncing with foreign bank accounts is a nightmare. Sometimes when sending money out of the country, you just get fed up waiting and walk over to your nearest Western Union and pay their ridiculous fee. Time is money and Western Union is pretty much a sure thing for sending cash.

Disclosure: We own shares.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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