Published by Bob Ciura on March 28th, 2017
Taking a look inside the portfolios of the world’s most well-known investors can be a valuable way to find investment ideas.
For example, Joel Greenblatt is the Managing Principal and Co-Chief Investment Officer of Gotham Asset Management, which manages approximately $15 billion in stock investments.
Gotham Asset Management offers several mutual funds that take both long and short positions in stocks.
On the long side, Joel Greenblatt owns many high-yield dividend stocks.
Among the top 20 dividend stocks in Joel Greenblatt’s portfolio is Western Union (WU).
Western Union is not on the list of Dividend Achievers, because the company held its dividend steady in 2014.
The Dividend Achievers are a group of 271 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
However, Western Union recently increased its dividend, has a solid 3.5% dividend yield, and the stock is very cheap.
This article will discuss why Western Union could be an attractive stock for dividend investors.
Western Union operates in global payments. Its services allow customers to send and receive money around the world.
Western Union has a globally diversified network.
Source: 2016 Investor Day Presentation, page 5
It collects fees from these services to generate revenue. The company operates three business segments:
- Transaction Fees (70% of revenue)
- Foreign Exchange (27% of revenue)
- Other (3% of revenue)
Approximately 80% of Western Union’s revenue comes from consumer-to-consumer services.
On the surface, Western Union’s financial performance last year looks terrible. Earnings-per-share declined 69% in 2016.
However, the company incurred $601 million of charges last year to settle investigations by the U.S. federal government and state government agencies.
The investigations focused on improper conduct by certain Western Union agents, and a lack of oversight when it came to anti-laundering and anti-fraud controls.
Excluding the huge penalty, Western Union’s adjusted earnings-per-share actually increased 4.8% in 2016, to $1.75.
This indicates the core business continues to perform well. And, conditions actually improved as 2016 drew to a close.
For example, constant-currency revenue increased 4% in the fourth quarter, year over year.
Source: 4Q Earnings Presentation, page 8
Total revenue fell 1% in 2016, but this was due mostly to the strong U.S. dollar. Western Union has a large international presence.
Approximately 71% of the company’s consumer-to-consumer segment revenue last year was generated outside North America.
This exposes Western Union to foreign exchange fluctuations. In 2016, total revenue actually increased 3% on a constant-currency basis.
Going forward, Western Union has several strategic initiatives planned to continue growing earnings.
First, the company deployed a cost-cutting strategy called the WU Way. This program was launched to help drive innovation and improve cost efficiencies.
Thanks to the WU Way program, the company expects to generate cost savings of $20 million this year, and $25 million in 2018.
Western Union’s growth strategies are encapsulated in the company’s 2020 vision.
Source: 2016 Investor Day Presentation, page 20
The biggest growth catalyst for Western Union is mobile transactions.
The world is steadily gravitating away from physical retail locations, toward e-commerce.
This is particularly true when it comes to mobile payments.
By 2020, the company is targeting a multi-channel approach, across several points of distribution and multiple product offerings.
Source: 2016 Investor Day Presentation, page 22
Western Union has invested heavily in its online capabilities, and is seeing strong results.
For example, westernunion.com grew its number of transactions by 28% last quarter. This drove 30% year over year revenue growth.
Western Union’s international reach will help boost future growth as well.
The company has a significant presence in the emerging markets. One particularly strong region is Latin America, where revenue increased 16% in constant currency, thanks to 14% growth in transactions.
Another growth catalyst is consumer-to-business services. This is a high-growth segment for Western Union.
Consumer-to-business fees increased 11% in 2016.
For 2017, Western Union expects currency-neutral earnings-per-share within a range of $1.72-$1.84. This would represent a decline of 1.7% to an increase of 5.4% from 2016.
If the company continues to grow earnings, the company could raise its dividend more regularly. For example, Western Union recently raised its dividend by 9%.
Competitive Advantages & Recession Performance
Western Union’s biggest competitive advantage is its global footprint. It has more than 200 regulatory licenses, and it offers 130 currencies.
The company has an extensive reach, with more than 500,000 retail locations in more than 200 countries and territories around the world.
This gives the company a high level of brand awareness, around the world.
Source: 2016 Investor Day Presentation, page 13
In turn, a strong brand gives Western Union a leadership position in its industry.
These qualities provide Western Union with a recession-resistant business model. Western Union generated steady profitability during the Great Recession.
It even managed to increase earnings-per-share in 2008 and 2009:
- 2007 earnings-per-share of $1.11
- 2008 earnings-per-share of $1.24
- 2009 earnings-per-share of $1.29
- 2010 earnings-per-share of $1.42
The fact that Western Union increased earnings-per-share by 12% and 4% in 2008 and 2008, respectively, is a rare feat.
Valuation & Expected Total Returns
Western Union is a very cheap stock.
Shares trade for a price-to-earnings ratio of just 11, based on the company’s 2016 adjusted earnings-per-share.
This is well below the market average. The S&P 500 Index has an average price-to-earnings ratio of 26.
It is not surprising to see the stock hold a discounted valuation multiple, based on the investigations last year and the ensuing hefty financial penalty.
That said, the underlying business continues to perform well. And, now that the investigation is resolved, the company can get back to business as usual.
Over time, this could result in a higher valuation multiple moving forward, as the settlement fades into the rear-view mirror.
In addition to an expanding price-to-earnings multiple, Western Union’s future returns will be comprised of earnings growth and dividends.
A possible breakdown of the company’s future returns could be as follows:
- 3%-5% organic revenue growth
- 1% earnings growth from cost cuts
- 1% earnings growth from share repurchases
- 3.5% dividend yield
Based on this, future returns could reach approximately 8.5%-10.5% per year.
Western Union endured a difficult year in 2016. The company’s brand reputation was tarnished from the investigations into agent misconduct.
And, the resulting financial penalty greatly depressed earnings-per-share last year.
However, Western Union has a long operating history, going back more than 150 years. It is one of a small group of stocks that has been in business at least 100 years, with at least a 3% dividend yield.
Going forward, investors should focus on Western Union’s growth potential, which remains intact.
With a 3.5% dividend yield and a cheap stock, Western Union is an attractive stock consideration for income and value investors alike.