The best dividend-payingstocks are often familiar names that
have been around forever, but don't get much attention from
analysts. And right now is the best time to invest in stocks that
pretty much provide investors with a steady stream of income that
grows bigger year after year.
Such is the case with
Western Union (
WU
)
, the global leader in money-transfer services. Going strong since
the 1850s, the company went public in 2006 when it was spun off
from First Data.
Not many analysts pay attention to thisstock , butdividend
investors should find alot to like about Western Union. It has a
leadingmarket share , 10 years of relatively consistent growth,
abusiness model that produces enormous amounts ofcash flow and a
firm commitment to returning more of itscash to investors. This is
what we here at StreetAuthority refer to as a
Retirement Savings Stock
.
Most of the world is familiar with the Western Union brand and
millions of people use the company's services to wiremoney on a
dailybasis . Last year, Western Union handled 226 million customer
transactions worth more than $81 billion. At present, the company
has 510,000 locations in more than 200 countries and
territories.
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You might be worried that PayPal and other online money-transfer
tools are making Western Union's services extinct, but so far, that
hasn't been the case. In fact, the company has continued to grow
steadily, increasing sales andearnings even during therecession
.
There are several reasons for this company's reliable growth.
First, Western Union's customers often don't have bank accounts or
Internet access. Many are immigrant workers who use the company's
services to send much-neededfunds home to their families. Also,
these customers seek a money-transfer middleman that's reliable and
trustworthy. As one of the world's best-known brands, Western Union
has a global network that is nearly 80% larger than its next
largest competitor,
MoneyGram International (
MGI
)
. The company controls 18% of the wire-transfermarket , which is
three times the market share of MoneyGram.
A major advantage that comes with Western Union's superior size
is greatereconomies of scale . Western Union's costs per
transaction are lower than competitors, according to management.
Because of this, the company has been able to maintain operating
margins consistently above 25%. This compares favorably to the
operating margins of MoneyGram at just 15%.
Western Union's business is also easily scalable, typically
providing a rich 17%return on capital (due to low capital costs)
and generating more than $1.1 billion of cash flow annually.
Withfixed costs accounting for less than 40% of overall costs,
every incremental transaction adds value to Western Union'sbottom
line .
During the third-quarter of 2012, Western Union's
year-over-yearrevenue improved 1% to $1.42 billion,net income
jumped 12% to $270 million and earnings rose 18% from to 45 cents
per share.
Despite these strong results, the company business is being
negatively affected by compliance-related charges and
competitive-pricing pressures in some markets. As a result, Western
Union plans to implement new cost-cutting initiatives and reduce
its prices in some markets. These are the main reasons for a 5%
reduction in full-year 2012 earnings guidance to $1.62 a share and
a 10-15% decline in 2013 earnings guidance. Cost-cutting
initiatives are expected to pay off, however, with more than $30
million of annual cost savings by 2014.
The stock market's response to the reduction in earnings
guidance was a massive sell-off that dropped Western Union's share
price to a three-year low, as you can see in the chart below.
Theseshares have since regained some ground, but are still priced
25% below where they were just one year ago.
This sell-off has made Western Union incredibly undervalued. The
stock currently trades at a price-to-earnings (P/E ) ratio of just
7, which represents a five-year low and roughly one-third of the
industry P/E of 20. This meltdown occurred despite a 25% increase
in Western Union's dividend to a new annual rate of 50 cents a
share, which yields a generous 3.6%. In addition, Western Union
announced plans for $750 million worth of share repurchases
thatwill help to enhance future earnings growth.
Companyinsiders clearly see the sell-off as a buying opportunity
and have been loading up shares. In November 2012, top officers and
directors together purchased 53,660 Western Union shares, currently
valued at close to $7.5 million.
Although Western Union's growth will likely slow in 2013 due to
more competitive pricing, analysts say the company could return to
9% earnings gains by 2014 and average 9% growth in each of the next
five years. The remittance market Western Union serves is returning
to steady 5% annual growth after a brief downturn during the
recession. In addition, the company is increasing itsmarket
penetration in the United States and Europe, expanding its network
in Asia and leveraging new digital delivery channels. Western Union
anticipates five-fold growth in its digital business during the
next three years and achieving $500 million in digital revenue by
2015.
With annual cash flow exceeding $1 billion, Western Union has
plenty of capital to support these expansion plans and future
dividend growth. Dividend payout is just 19%, which leaves ample
room for more double-digit dividend hikes.
Risks to Consider:
Western Union plans to boost market share erosion for its Vigo
money-transfer business in Latin America by reducing prices. While
lowering prices will likely help the company improve market
share,profit margins will also shrink. Western Union plans to
maintain high margins through cost-cutting. The company is also
stepping upinvestments in new technologies. These investments
should help the company's competitive positioning in the long-run,
but will result in short-term increases in operating costs.
Action to take -->
Before the October 2012 selloff, Western Union shares were yielding
just 2%. Now is a great time to lock in a fast-rising dividend and
3.6%yield by buying a stock that trades incredibly cheap against
its peers.