One look at a chart of Western Union (NYSE:
WU
), the dominant provider of payment transfer and non-banking
money movement services, and it is easy to understand why many
investors would be skittish about the stock. In late October, the
shares were flirting with $18. Today, it appears likely the stock
will close below $13.
That is a precipitous slide to say the least and one brought
about by a rash of analyst downgrades. For example, earlier this
month Standard & Poor's lowered its long-term issuer credit
rating on Western Union to 'BBB+' from 'A-,' citing increased
competition in the money transfer space. Fitch Ratings followed
that up by lowering all of Western Union's senior unsecured
ratings to 'BBB+' from 'A-'. Fitch has a negative outlook on
Western Union.
After all that, investors are left to ponder the fate of
Western Union and if there is any upside here. Or maybe the stock
is just another falling knife. There is compelling, fundamental
evidence to suggest it is more a case of the former than the
latter. Here is why:
The Dividend
Western Union is not a bank stock, but it is fair to call this a
financial services name. A dividend yield of 3.9 percent is quite
spectacular among U.S.-based financials. So is Western Union's
dividend growth. Six years ago, the company paid its first
dividend of a penny per share. Earlier this year, the company
boosted the payout by 25 percent to 10 cents a share. Good luck
finding a large-cap bank whose dividend has risen tenfold in the
past six years.
Western Union's
payout ratio is just 19 percent
, indicating there is more upside potential for the dividend in
the years ahead.
Favorable Environment
Although it did them little good, a favorite battle cry of
Republicans during the just completed election season was that
number of Americans on welfare has risen dramatically since
President Obama took office. That may not be the President's
fault, but there is not getting around the fact that more
Americans receive some form of government assistance today than
in 2008.
Unfortunately, that means there are more folks that can be
classified as "poor." Something that often goes unnoticed about a
rising number number of people with financial struggles is that
number of Americans living outside the traditional banking system
rises. The number of U.S. households without bank accounts was 10
million as of mid-September compared with 9 million in 2009,
according to the L.A. Times
.
Said another way, nearly three in 10 households and one of
every 10 Americans does NOT have a checking account. That does
not mean these folks do not have a need to write checks. Since
many of them are banished from traditional banks, they have to
rely on a company like Western Union to provide money transfer
services, money orders and pre-paid debit cards to help pay their
bills.
It is a sad commentary that the richest nation in the world
has 10 percent of its citizens lacking a checking account, but
that commentary bolsters the bull case for Western Union.
Wide Moat
Warren Buffett is famous for saying he likes to invest in
businesses with a "wide moat" or significant barriers to entry
for competitors. Combine that with the dividend and Western Union
would appear to be a stock that Buffett would like.
Yes, the company faces increased competition, but on a global
basis, Western Union is the Coca-Cola (NYSE:
KO
) of money transfer services; Western Union is the most
recognizable brand in this market segment. The company has 17
percent global market share and its number of agents has surged
to 500,000 from just 120,000 in 2001,
according to one analyst
.
What is interesting about Western Union and its competitors is
that the company is the low-cost leader in the money transfer
business. It could charge more for its services, but opts not to,
thereby using its brand to squeeze competitors. The reality is
Western Union's rivals would have to sacrifice their own
profitability to compete with the company on price.
Investors with long-term time horizons can embrace Western
Union at current levels, particularly if they plan to use a
dividend reinvestment strategy. Short-term traders should put a
stop in the $11 area.
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