A Member of Pat McKeough’s Inner Circle recently asked for his advice on a long-established stock that is going through the latest of many changes.
Western Union first began building a transcontinental telegraph network in the 1850s. Today it specializes in money transfers, but that business is changing as well. The company is moving from physical money transfers to digital transfers, which now account for 10% of its revenue. Increased competition hurt the company’s earnings in recent years, says Pat, while a higher U.S. dollar undermined the value of its international transfers. However, the company’s earnings rose in the most recent quarter and it maintains a dividend that yields 4.0%.
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Q: Pat: What do think of Western Union as a long-term investment? Thank you.
A: WESTERN UNION CO. (symbol WU on New York; www.westernunion.com) offers global money transfer services through more than 550,000 agent locations in over 200 countries.
Western Union gets about 70% its revenue from the fees it charges its retail customers to transfer money around the world. Business customers receive more complex services, including currency management, hedging and bill payments; they contribute the balance of the revenue.
Over the five years from 2013 to 2017, the company’s revenue declined from $5.54 billion to $5.52 billion.
Its earnings, excluding one-time items, grew 6.8%, from $798.4 million in 2013 to $852.4 million in 2014. Due to fewer shares outstanding, per-share earnings jumped 13.3%, from $1.43 to $1.59.
The company’s total earnings in 2015 fell to $852.4 million, but earnings per share rose to $1.62. Per-share earnings improved to $1.66 a share (or a total of $824.2 million) in 2016. They then dropped to $1.60 a share (or $718.0 million) for 2017.
That decline is mainly due to increased competition, which has cut money-transfer fees. A rising U.S. dollar has also hurt the contribution of Western Union’s international operations.
Growth stocks: Stock has increased its dividend every year since 2006
In the quarter ended June 30, 2018, revenue rose 2.3%, to $1.41 billion from $1.38 billion a year earlier. Earnings rose 30.7%, to $217.6 million from $166.5 million. Earnings per share rose 37.1%, to $0.48 from $0.35, on fewer shares outstanding.
Western ended the quarter with cash of $938.3 million, or $2.04 a share. Its long-term debt of $3.3 billion represents a manageable 39% of its market cap.
The stock now trades at just 10.0 times the forecast 2018 earnings of $1.90 a share. The company has increased its dividend every year since it started making those payments in 2006. The current annual rate of $0.76 a share yields 4.0%.
Western still gets most of its business from physical money transfers, but it’s moving steadily into digital money transfers through electronic channels such as westernunion.com and mobile money transfers. Those channels contributed 10% of the company’s consumer-to-consumer total revenue in the latest quarter. That’s up from just under 6% in 2015.
Inner Circle recommendation: Western Union is okay to hold.
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