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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Risk-Reward With Western Union

The global leader in money transfer is finally a buy

April 18, 2019 | About:

The future of money is fully digital, and Western Union (NYSE:WU) remains focused on the high-stakes race for control of the $500 billion digital payments market. In fact, in the fourth-quarter, Westernunion.com money transfer transactions saw 25% growth, continuing a 21% advance from the previous quarter. Competition is fierce and crypto currencies are still a lurking disruption.

Western Union has the most widely known brand in an industry where size equates to durable competitive advantages. Processing costs are driven down with scale and its size has helped Western Union create operating margins that are double any of its competitors. And, as long as it continues to invest to maintain the advantage, it’s likely to keep it for decades to come.

This isn’t a growth story. Despite the economic advantages, Western Union has seen its margins fall and its capital spending rise over the last decade. The company has increased revenue a paltry $500 million to $5.59 billion in the last 12 months. And, its net income is essentially flat. The stock has faired roughly the same. After doubling from the bottom of the housing crisis in 2009, prices have been choppy with trading confined in a range of $12 and $22 per share.


That said, the company generates enough free cash flow and positive earnings to easily cover its dividend payment (76 cents) and spending to maintain its leadership position. Western Union is also buying back stock to increase owner earnings and looking for digital to really be the growth driver of the future.

Management plans to broaden the digital operation including more partnerships and an increased presence in underserved regions like Asia, the Middle East, Africa and Latin America.

Earlier this month, it announced a partnership with Philippines-based e-wallet provider coin.ph for cross-border transactions, which according to the World Bank has one of the highest inflows of money from outside its borders. Coin.ph has over 5 million users and Western Union has 12,000 locations in the country.

Western Union has also struck various partnerships over the last year to strengthen its digital offering, teaming up with Amazon.com to launch a new payment option for cross-border customers shopping on the retailer’s website. The service is expected to ease transactions by facilitating the complex foreign exchange and settlement process, potentially attracting millions of new customers to both platforms. Western Union entered into a strategic arrangement with JD Digits, a leading technology purveyor in China with more than 400 million customers, exploring ways to speed up cross-border remittances and payments where an estimated $75 billion in transfers took place last year.

Investors can expect a dividend increase in early 2019, putting the yield over 4.1% as the company looks to earn upwards of $2 per share this year and in 2020, which if the stock was priced based on historical earnings multiple, shares would in the $40 range at some point in the next two years.

The play here is on valuation with an eye toward future potential. As nice as it may be to think that Western Union can double its financial numbers through a digital push, only time will tell if that’s true or not. However, will it be around in 20 years? Yes, and the money transfer services it provides may actually be more necessary to the market.

Disclosure: I am not long/short any stock mentioned.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

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