Why Now is the Right Time to Invest in this 160 Year Old Company?

Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Founded as the Mississippi Valley Printing Telegraph Company in 1851, Western Union (NYSE: WU) has logged more than 160 years as a company and continues to be one of the most recognized brands in the world.  A history of innovation and evolution now lands Western Union as the dominate money transfer business in the world.  Following the spin-off from First Data Corp in late 2006, the independent publicly traded company has been widely ignored by investors.  Western Union stock has languished and underperformed the S&P 500 by more than 20% on a total return basis over the last six years.  However, the stock currently has great appeal for investors looking for wide-moat firms that still trade at an attractive valuation.  This is getting harder and harder to come by as many blue-chip companies such as The Coca-Cola Company (NYSE: KO) and Home Depot (NYSE: HD) blow through the 20x price-to-earnings threshold.  The demand for these stable businesses and steady dividends has been pronounced in the last year, but Western Union has been ignored despite many of the same attributes.

Stable Business

Western Union has demonstrated its stability over the course of its 160 year history.  A couple aspects lend itself for a continuation in this trend.  First, the company exceeds 80% global brand awareness and has more than 70 million users.  They operate in 200 countries and have more than 500,000 locations.  The company generates more than 80% of revenues from their consumer-to-consumer business, but 85% of these transactions involve at least one non-U.S. location.  Western Union’s leading segment, Europe (22% of sales), and its depression have resulted in segment sales falling 8% in the second quarter.  Still, the company reported revenues up 7% on a constant currency basis.  This demonstrates the diversity and stability of the company.

Another sign of the company’s strong competitive position is the strength of their EBITDA margins.  The chart below highlights Western Union’s robust 28% EBITDA margins and how superior this is to the next closest competitor, MoneyGram International (NASDAQ: MGI), which generally has margins in the mid-teens.


<img src="http://media.ycharts.com/charts/970d8c5a8db6d98b0dea3f876b379125.png" />


Many could viably argue that the money transfer business model is poised to break previous barriers as technology advances take center stage.  I don’t disagree, but think Western Union will maintain it’s dominating brand strength as these events transpire.  First, the company is investing in its online capabilities.  In the second quarter, online sales were up 23% and transactions soared 35%.  Secondly, increased regulation continues to be a focal point in the money transfer business.  Most of these activities center on anti-money laundering, anti-terrorist activities, and consumer protection.  The more regulation, the more beneficial it is to the existing leader as these costs are proportionally more onerous on small businesses. 


It is hard to find a company that is as stable as Western Union and next to impossible to find one that is trading at 11x trailing earnings- a more than 20% discount to the S&P 500.  And it isn’t like the company isn’t growing.  First, they were able to avoid the negative summer guidance that has plagued so many companies amid slowing global growth.  According to Bloomberg estimates, the company is expected to grow earnings-per-share approximately 10% in each of the next two years.  This would match the 10% growth achieved in 2011.  This equates to a price-to-earnings-to-growth rate of a little more than 1.0, which is extremely difficult to find in a wide-moat firm.  Many high-quality companies have price-to-earnings ratios nearly twice the underlying growth rate. 

Western Union has stellar returns on invested capital, the ultimate measure of management performance.  This ratio, while often times difficult to measure, is one of the best at distinguishing the competitive position of companies.  Those with high ROIC generally have wide-moats and exploit their favorable circumstances.  Conversely, those companies in the highly competitive industries, such as steel, rarely obtain ROIC levels above their weighted average cost of capital.  The chart below highlights how Western Union’s ROIC levels stack up to previously referenced Coca-Cola and Home Depot, both with P/E ratios above 20x. 

<img src="http://media.ycharts.com/charts/e3ae3d92b297ec89d8c18035b7a46994.png" />



Western Union probably doesn’t screen well on dividends, but it should.  The company has a 2% dividend yield, which doesn’t pop a wow factor, but looks far better on closer inspection.  First, the dividend has more than doubled in the last three years.  Second, the payout ratio is just 16% and leaves plenty of room for expansion.  And lastly, the company generates more than $1 billion in annual free cash flow.  While there is a steady share buyback plan in progress, there is plenty of cash available to be funneled into a steadily increasing dividend payout as well.   

Inflation Protection

Worried about inflation?  If so, Western Union has extra appeal.  Unlike other blue-chip companies concerned with rising commodity costs and how to pass these on to consumers with declining real wages, Western Union’s sales will benefit in an inflationary environment.  With inflation, the amount of dollars remitted will automatically be higher and so too will be the fees the company charges.  Increasing inflation will help the company beat expectations on both sales and EPS, a situation that usually leads to market-beating returns.

The Foolish Bottom Line

Investors should certainly favor stocks over bonds, especially if the focus is on long-term retirement savings.  But instead of clamoring for some of the frothy blue-chips, Western Union makes for an ideal substitute.  It is a great choice for patient investors that are seeking stability for a certain portion of their portfolio.  The company pays an increasing dividend, has a cheap valuation, generates ample cash flow from notable competitive advantages, and offers inflation protection for next to nothing.  There isn’t a real catalyst to propel the stock higher in the near-term, but instead it fancies itself as a tortoise in the long race.  Investors should measure the success of this investment in five years or more, not in the next couple of months.  And when they do, they should be pleasantly surprised.

market8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Coca-Cola Company, The Home Depot, and Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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