Sometimes it's the oldest, most boring companies which offer the greatest opportunities. While some invest in cutting-edge tech companies trading at astronomical multiples on the hope that someday they'll actually turn a profit, I prefer companies with a long history of success and a durable competitive advantage. Often these types of companies carry with them a premium, but The Western Union Company (NYSE:WU) is trading at multi-year lows after an earnings miss last year. Couple that with a recent 25% dividend increase and Western Union may be one of the best deals of the year.
What does Western Union do?
I think that Western Union is somewhat misunderstood by investors because it's a service aimed at those without easy access to banks or the internet. Western Union's website says:
"Our vision is to be the preferred financial services provider for the under-served, which means finding new products, capabilities, technologies and partners to better serve our current customers, and potentially two billion consumers with unmet financial service needs. It also means meeting the evolving needs of under-served businesses to make cross-border payments, allowing them to grow, create jobs and better compete in the global economy."
People tend to like investing in companies which they use or buy products from, but I'm willing to bet that investors and Western Union's customer base are mutually exclusive groups. People hear the name Western Union and think of telegraphs, not a modern financial services company. But Western Union has been thriving as the total money-transfer market has grown.
Most of Western Union's revenue comes from customer-to-customer transactions. Immigrants in developed countries sending money to family in undeveloped countries are a common type of customer. Western Union makes money from transaction fees as well as from the spread between the exchange rate they offer their customers and the exchange rate their agents are able to get. For these types of people there is often no alternative to Western Union. About half of the world is unbanked, creating a huge market for Western Union.
Wester Union has a network of over 500,000 agents in more than 200 countries. One thing which makes the Western Union model successful is that the cost of adding a new agent is insignificant. Anyone, once approved, can offer Western Union services. This makes it very easy for the company to expand.
Western Union is by far the largest money-transfer company with a 20% market share, and processes about four times the number of transactions as the next-largest money-transfer company Moneygram International Inc (NYSE:MGI). Although many people claim that services like Paypal from eBay Inc (NASDAQ:EBAY) will destroy Western Union's business, it's important to understand that they serve different customers. Most of Western Union's customers don't have a bank account which makes using Paypal much less convenient. In addition, many people who receive money-transfers in undeveloped countries don't have access to the internet, making Western Union the only option. In contrast, Paypal deals mainly with online purchases.
The best value
Let's look at dividends first. Western Union recently increased its dividend by 25%, raising the yield to about 3.7% based on the most recent quarterly dividend. This puts the payout ratio using current TTM free cash flow at about 30%. Western Union is also aggressively buying back shares, with $750 million approved for the rest of 2013. This means that most of the company's free cash flow is going back to the investor one way or another.
MoneyGram hasn't paid a dividend since 2007. eBay has never paid a dividend. From a dividend investors perspective, Western Union is the clear choice.