Western Union (WU, Financial) provides domestic and international money transfers through its global network of over 600,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network. It offers money transfer services to every country except for North Korea and Iran. The company does about 24 transactions every second of the day.
The company has a storied history in the U.S. dating back to 1861, where the company utilized telegraphs, which was the hottest technology of the era. The company had adapted to changing times through electronic money transfer and is now embracing the digital payments era.
Business segments
The business operates through two main segments: Consumer-to-Consumer and Business Solutions.
The Consumer-to-Consumer deals with money transfers from one consumer to another and is the core business for Western Union. It represented 87% of the company's total consolidated revenues for 2021. A substantial majority of these transfers are cross-border transactions. The money transfer service is mainly conducted through physical retail agent locations worldwide but also includes fast-growing money transfer transactions conducted and funded through websites and mobile applications.
The Business Solutions segment, which represented only 8% of total consolidated revenues for 2021, facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and individuals. The significant majority of revenue in this segment is derived from foreign exchange resulting from the difference between the exchange rate set by the company to the customer, and the rate available in the wholesale foreign exchange market. The significant majority of Business Solutions revenue is generated outside the United States. The company has recently announced that they will divest the Business Solutions segment over several phases in 2022.
Financial review
The company's last full-year results were for 2021. Revenue of $5.1 billion increased 5.0% compared to the prior year, or 4.0% on a constant currency basis. This revenue increase was driven by strong growth in digital money transfer and the Business Solutions segment. Total Consumer-to-Consumer revenue grew 4.0%, while digital money transfer revenue increased 22% compared to 2020. Business Solutions also contributed revenue growth, increasing 18% compared to the prior year.
Operating margins increased to 22.5% from 20.8%, primarily driven by revenue growth, mix of commissions and foreign exchange impacts. Adjusted earnings per share was $2.19 compared to $1.87 in 2020.
The company typically generates significant levels of free cash flow. Operating cash flow in 2021 was $1.0 billion and capital expenditures (include software and contact costs) totaled $214 million. Free cash flow uses include $382 million in dividends, $410 million in share repurchases and debt repayment of $63 million.
Valuation
Company guidance calls for 2022 flat to low-single-digit organic growth in revenues and an operating margin of 21% to 22%. Adjusted earnings per share, excluding unusual items, is expected in the range of $1.90 to $2.00
Analyst consensus EPS estimates call for $1.96 for 2022 and $2.10 for 2023. The company’s low forward price-earnings ratios reflect investor sentiment that their core business is secularly challenged due to the advent of modern technology driven payments systems such as Venmo or cell phone payment systems, which usually offer lower fees.
The company's annual dividend is $0.94, and with analyst estimates averaging about $2.00 for the next couple of years, the forward EPS payout ratio remains very safe at 50%. The dividend yield based on the current stock price is 5.20%, which is more than twice the 1.35% average of the S&P 500 stocks.
Guru trades
Gurus who have purchased or added to their Western Union positions recently include Jeremy Grantham (Trades, Portfolio), John Rogers (Trades, Portfolio) and Mark Hillman (Trades, Portfolio). Gurus who have reduced or sold out of their positions recently include Joel Greenblatt (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
Conclusion
Western Union appear to be substantially undervalued, in my opinion. I believe the market is overestimating the competitive headwinds. If the company can continue its transformation to more digital and online based payment systems, I think the stock could see tremendous upside. If this transformation takes longer than expected, or never happens in a material fashion, the company’s core business will continue to generate cash flow to sustain the above-market dividend yield.
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