THE WESTERN UNION CO. $28 (New York symbol WU; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 740.0 million; Market cap: $20.7 billion; WSSF Rating: Above average) provides money transfer and foreign exchange services. It operates in more than 200 countries through a network of 335,000 agents, such as post offices, banks and retailers. Over 80% of Western Union’s agents are located outside of the United States.

The company began operations in 1851, and was one of the original 11 companies included in the Dow Jones average. In recent years, Western Union was a wholly owned subsidiary of First Data Corp. On September 29, 2006, First Data spun off Western Union to its own stockholders as a special dividend.

Western Union’s main business is consumer-to-consumer transfers of money, which accounts for roughly 85% of its total revenue. The company charges the sender a fee based on the size of the transfer and the destination. Western Union also makes money on the conversion of funds from one foreign currency to another. In 2007, it processed 167.7 million transactions, up 14% from 2006.

The company’s other main business is consumer-to-business transfers. This operation lets consumers pay their bills at a Western Union location, for a fee. The company has long-standing relationships with billers such as utilities, auto finance companies, banks and government agencies. In 2007, Western Union processed 404.5 million of these transactions, up 62% from 2006.

Western Union also offers money orders, pre-paid credit cards, and “top-up” services that let consumers pay in advance for mobile phones or other services.

Revenue grew from $3.2 billion in 2003 to $4.9 billion in 2007. Earnings rose from $0.83 a share (total $633.7 million) in 2003 to $1.21 a share ($927.4 million) in 2005. However, earnings fell to $1.19 a share ($914.0 million) in 2006 and to $1.11 a share ($857.3 million) in 2007, partly due to the extra expenses it incurred as an independent company.

Western Union now aims to expand its long-term earnings with new products and services, particularly in overseas markets.

“Intra-country” transfers rising

Right now, China and India each account for just 6% of Western Union’s revenue. Adding more offices in these countries will let the company take advantage of spreading economic prosperity. More offices will also help Western Union handle growing demand for money transfers within countries.

The company is also making it easier for its customers to use its services. For example, its Internet site lets customers send funds or pay bills using a credit or debit card. The service is now available in the U.S. and 11 other countries. The company is now working on a new service that will make it easier for small businesses to pay their bills over the Internet.

Western Union is also testing a new service in the Philippines that lets customers use their mobile phones to transfer funds. This has big potential as more people in developing countries use mobile phones rather than traditional phones.

As well, Western Union has teamed up with a Hong Kong-based bank to test a new “micro-lending” concept. Micro-lending involves making small, unsecured loans to individuals with limited credit history. Western Union will not underwrite these loans, or assume any credit risk. The company feels these borrowers will eventually use its other services.

New alliances with overseas banks

Another part of Western Union’s growth strategy involves alliances with foreign banks. For example, Indonesia’s second-largest private bank recently agreed to provide Western Union services through its 400 branches. This deal has big potential. Indonesia currently has more than 4.7 million of its citizens working overseas, and they remitted about $5 billion to their home country last year.

Similar deals with banks in Poland and South Africa should also expand Western Union’s long-term earnings.

As the world’s leading money transfer firm, Western Union faces increasing government regulation. Setting up systems to monitor transactions for terrorism or money-laundering purposes adds to the company’s costs. However, immigration from developing countries to industrialized nations continues to rise. That should continue to fuel demand for Western Union’s services.

Western Union will probably use its strong cash flow to pay down its total debt of $3.4 billion (18% of its market cap). It also plans to buy back nearly $1.6 billion worth of its stock over the next year. The company currently pays an annual dividend each December. The most recent payment of $0.04 a share implies a yield of 0.1%.

Growth potential, brand justifies p/e

If you exclude restructuring costs related to the closure of its San Francisco facility, Western Union should earn $970 million or $1.31 a share in 2008, and the stock trades at 21.4 times that figure. That’s reasonable in light of its expanding global operations and well-known brand name. As well, the restructuring should save it $10 million in 2008 and $35 million a year thereafter.

The stock is a buy. We’re adding Western Union our Aggressive Growth Portfolio.