2023-03-16 10:27:48 ET
Summary
- The Western Union Company is one of the most widely recognized leaders in cross-border money movement services.
- Though the industry is highly competitive, the company has the experience and scale necessary to retain market share.
- The recent selloff afflicting the regional banking sector has pushed shares down to some of their lowest trading levels on record.
- This has presented a "too material to ignore" opportunity to lock up both the upside potential and a dividend yield that is currently near 9%.
The Western Union Company (WU) is a leader in global cross-border money movement services. They have over 120M customers worldwide and operate through an expansive network that includes approximately 600K agents. Their brand is among the most widely known and used, with over 90% brand awareness in large markets.
In recent days, the stock has fallen victim to the broader market selloff following the collapse of Silicon Valley Bank. In fact, the decline over the past five days has been significantly deeper than the broader S&P 500 (SPY). And over the past month, the declines are around those suffered by the Regional Banking ETF (KRE).
Seeking Alpha - Monthly Return Of WU Compared To S&P 500 And Regional Banking ETF
This has brought shares down to some of their lowest trading levels on record.
YCharts - Price History Of WU
Yet WU is not a bank in the traditional sense. Their business, instead, centers around the movement of money. This is a resilient operating model that has created a sizeable moat for the company. For investors, the upside in the shares is too material to ignore. Additionally, their dividend payout is currently yielding nearly 9%. Together, investors could see total returns of nearly 50% on any sustained reversal in sentiment in my view.
The Business
WU is a leader in global money movement and payment services. At the end of 2022, their global network included agent locations in more than 200 countries and territories.
In a typical money transfer transaction, WU derives their revenues primarily from the fees paid by their customers to transfer money.
These revenues vary by transaction based on several factors, one of which is the exchange rate the company sets to the customer and the rate available in the wholesale foreign exchange market. This factor is especially important, considering a substantial majority of their transactions are cross-border transactions.
The transfer of money between parties could occur either through retail or digital means. In a retail transaction, the transfer is facilitated by one of their large, global networks of agents, which include post offices, banks and retailers, and other established organizations which typically provide other consumer products and services.
In a digital transfer, the consumer can initiate a transfer directly from a Western Union branded website or mobile application or from sites and applications hosted by one of their partners.
Through 2022, WU conducted their business in two reportable segments: Consumer-to-Consumer ("C2C"), which represents about 90% of their business, and Business Solutions.
2022 Form 10-K - Percentage Of Total Revenues By Segment
In the middle of 2021, however, they entered into an agreement to sell their Business Solutions business for total cash proceeds of +$910M. The terms of the sale called for three closings. Two of these tranches occurred in 2022. The final, then, is expected to be completed in Q2 of 2023.
The divestment of this segment enables WU to focus on C2C, which is their core business.
Geographically, WU's operations are worldwide, though they do have a higher concentration of exposure to North America ("NA") and Europe ("EU"). The two, together, represented about 70% of C2C segment revenues in 2022.
2022 Form 10-K - Geographic Footprint By Reportable Region
Looking ahead, however, the company faces attractive growth opportunities in each of their three other regions, which includes the Middle East, Africa, and South Asia ("MEASA"), Latin America and the Caribbean ("LACA"), and East Asia and Oceania ("APAC").
Recent Performance
In the final quarter of 2022, WU reported adjusted revenue of +$1.1B. This was down 6% from last year, due primarily to the suspension of their operations in Russia/Belarus, which impacted top line revenues by 3%.
In addition to the suspension of operations in these countries, WU also incurred costs relating to promotional pricing activities. And they also lost one European agent, which impacted revenues by 2% during the quarter. This was partially offset by a 1% inflation tailwind in their Argentina market.
Adjusted operating margins came in at 15.8% during the quarter. This was down significantly from 24.9% in the same period last year. Weighing on margins in the current period was lower revenues and higher costs associated with the rollout of their new brand digital strategy as well an increase in technology investments. Furthermore, last year's figures included a 60 basis point ("bps") benefit from the inclusion of the Business Solutions segment.
Despite the weaker quarterly performance, full year operating margins still came in at the midpoint of their stated range, at 20.4%.
On a segment basis, C2C revenues declined 9% on a constant currency basis, due to softer activity in their retail business, owing in part to a 12% decline in quarterly transaction volume, and more promotional activities. In addition, WU took a negative hit of 3% and 9% from the suspension of their operations in Russia and Belarus, respectively.
In their branded digital business, revenues declined 6% on a constant currency basis. But their new strategy that was launched during Q3 resulted in a 2% increase in transactions. In addition, in Q4, global new branded digital customers grew approximately 14%, with about 30% growth in new U.S. outbound branded digital customers.
Within individual regions, all save LACA, reported continued constant currency revenue and transaction declines. Most notably, revenue in Europe and the CIS region was down 17%, while transactions were down 31%. This was due primarily to losses attributable to Russia.
Q4FY22 Earnings Release - Summary Of Operating Performance By Region
Looking ahead , WU is expecting no major changes in macroeconomic conditions, including with respect to foreign currency. Nevertheless, they still expect adjusted revenue to be down about 2% to 4%. And they are expecting margins to track in the range of 19% to 21%.
More to the bottom line, they see EPS coming in at between $1.55 to $1.65/share. This would be down from $1.76/share in the current year due to a $0.18/share hit relating to the sale of their Business Solutions segment and losses attributable to Russia/Belarus and agent losses.
Dividend Safety
WU currently provides a quarterly dividend of $0.235/share. Annualized, this represents a yield of nearly 9% at current trading levels.
While the quarterly rate has remained fixed for the past several years, it did have a strong track record of growth in the years prior to the pandemic. Overall, the quarterly rate has grown over 30% from 2017 to 2022. And in total, the company has paid out nearly +$2.0B in dividends in the last five years.
2022 Investor Day Presentation - Highlight Of Dividends Paid Over The Last Five Years
In 2022, the company paid out over 50% of their free cash flow in dividends. In addition, they continue to engage in share repurchases, which reduces their burden in total dollar terms. In aggregate, WU returned over +$700M to shareholders in the form of dividends and repurchases in 2022.
At a payout ratio of just over 50%, sufficient capacity appears to be present for continuity in future periods. Their financial position is further supplemented by a strong liquidity position that consists of cash on hand of approximately +$1.3B and over +$1.0B of availability on their revolving credit facility. An investment grade credit profile, with leverage of 2.4x or 1.2x on a net basis provides further confidence of their ability to meet all their short and long-term obligations.
Final Thoughts
WU was caught up in the broader sell off affecting regional banks and the broader markets. This has pulled shares down to some of their lowest ever trading valuations.
Their current forward earnings multiple, for example, stands at less than 7x. Their five-year average , on the other hand, is about 10.3x. Likewise, their current enterprise value to EBITDA is about 4x. This compares to a historical average of 7x.
The company also has about +$1.3B in cash on hand. That, itself, is worth about $3.40 on a per share basis, meaning their remaining operations are currently being valued at just under $7.50/share, which would represent a forward multiple of just 4.8x.
While true that the past cannot dictate the future, these multiples seem widely out of line with the fundamentals of their business. The company has a leading position in the cross-border remittance industry, which is one that is expected to grow due to favorable demographic trends in both developed and developing countries.
In developed countries, for example, the population is aging. In contrast, population is growing rapidly in developing areas. Over the long run, this will support migration flows into developed countries, which is inherently supportive of remittance volume.
The company does operate in an intensely competitive market. And there are many lower cost alternatives out there. This is forcing the company to deploy new strategic initiatives and is also resulting in greater promotional activities.
The loss of business in Russia/Belarus also significantly affected their results due to their prior exposure. However, the effects of these additional costs and business losses are likely to normalize in future periods and are also likely to be offset by a growing share of activity in more attractive regions, such as Latin America and the Caribbean.
Following their steep losses in recent days, investors have a prime opportunity for new initiation in a time-tested company that is trading at a significantly depressed valuation. In addition to upside potential, which could be over 40%, based on a 10x forward multiple, investors would also lock in a dividend yield of nearly 9% at current pricing. For investors, the potential reward far outweighs the risks in my view.
For further details see:
Western Union: Materially Undervalued With A Dividend Yield Near 9%