Is Western Union an Undervalued Growth Play?

The money transfer business looks cheap with growth potential

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Dec 20, 2021
  • Western Union looks cheap compared to its cash generation
  • The stock could have an upcoming growth catalyst
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Most investors would agree that Western Union (

WU, Financial) is an old-world company. The group was founded as a telegraph business in 1851 and rose to become a global leader in the money transfer industry. For decades it dominated the industry thanks to its international network and well-known brand.

However, it has lost market share to newer competitors such as PayPal (

PYPL, Financial) in recent years. In many ways, Western Union missed the boat with the internet and the technological transformation that has occurred over the past decade or so. It still has its place in the world, but the company is not growing, and it is losing market share day by day.

Market share loss

It is not difficult to understand why. A quick search shows me that to transfer money from the U.K. to the U.S., Western Union charges over 3%. U.K.-based online money transfer service Wise charges around 0.7% per transaction. Wise is also pushing down costs as it grows, rewarding customers with lower prices for increased volume.

What's more, while PayPal may have a similar cost structure to Western Union, it is far easier to use and is integrated on most websites. Thanks to its expansive footprint in the late 1800s, Western Union took over the international and domestic U.S. money transfer market, but it has not been able to recreate the same competitive advantage in the internet age.

That is not to say that the company has missed the boat entirely. It is projected to report revenues of $5.1 billion this year and $5.2 billion in 2022. In 2015, the company reported revenues of $5.5 billion. Although revenues have shrunk, net profit has increased by around 1% since 2015.

More importantly, so has free cash flow. Western Union is a free cash flow machine. It generated a free cash flow of $1.90 per share in 2020 and has earned $2.09 in free cash flow over the past 12 months.

This free cash flow generation has been enough to fund a generous dividend; the stock currently supports a dividend yield of 5.2% and substantial share repurchases. The number of shares outstanding has shrunk at around 4% per annum since 2015.

From a value perspective, shares in Western Union do look quite attractive. The stock is trading at a free cash flow yield of 12% and a 2022 forward price-earnings ratio of 7.8. On top of the dividend yield of 5.2%, these metrics look particularly attractive in the current stock market environment.

And there is good news on the growth front. According to the company's third-quarter results, its digital money transfer business reported a 15% increase in revenues for the three months to the end of September.

Digital money business

Digital money transfer levels reached new quarterly highs, which is all the more impressive considering the significant digital demand the company experienced in 2020 in line with the rest of the industry. It is also remarkable considering that overall consumer-to-consumer transfer revenues declined 1% for the period.

As well as this growth avenue, the enterprise is also pushing ahead with the launch of a digital banking pilot in certain European markets. This could be an exciting new business venture for the enterprise. Considering its international footprint and brand recognition, Western Union's expansion into the digital banking market may be well received by consumers, although it is highly competitive.


As a value proposition with an upcoming growth catalyst, Western Union does appear attractive. A lot rests on whether or not the business can continue to expand in digital payments. If it can, this could be the growth catalyst the stock needs.

Investors may then benefit from the double tailwind of a valuation uplift and earnings growth. In the meantime, the company is returning significant amounts of free cash flow back to investors through repurchases and dividends.


I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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