Ultra High Yield Dividend Stock with 61.9% Upside

Investment Alert: Buy WU Under $$10/share

Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.

Key Points

1. Western Union is a cigar-butt stock, but it still produces strong cash flow and is a compelling dividend play for income-oriented investors.
2. It has faced growing competition from rivals like WorldRemit, leading to declining revenues over the past decade, but it has maintained a consistent gross margin and high returns on invested capital.
3. Despite its challenges, Western Union is undervalued and has a strong position in a growing industry, with a trusted brand, revenue diversification, and strategic partnerships.

A Cigar Butt Stock Worth Buying

Famously, Warren Buffett once quipped that some companies have publicly traded cigar-butt stocks. These are so-so companies that have a few last puffs in them before they go the way of the dodo bird. For example, Altria has manufactured and distributed tobacco products for decades. Obviously, the winds of change have blown against the company for years but it still produces monstrous cash flow for shareholders. In spite of anemic growth, the company is a compelling dividend play. Another that fits into this “cigar butt” category is Western Union.

Western Union is a global leader in cross-border, cross-currency money movement and payments but it has growing competitive threats from WorldRemit, the NEAR protocol, and others.

Clearly, the assault from rivals has taken its toll. In 2013, WU revenues were $5.5 billion while in 2022 they were $4.4 billion. What has stayed consistent throughout the last decade is the gross margin, which hovers around 40%. EBIT generally is reported around $1 billion too, though in the past couple of years it has slipped nearer to $900 million.

Why Buy Western Union?

It seems Western Union isn’t a compelling buy until you stumble upon its dividend, which is hyper attractive at 8.74%. But an ultra-high yield isn’t the only thing this cigar butt stock has going for it. It’s also got a 22.9% return on invested capital, which is the percentage return that a company earns on each dollar of capital invested in its business. Plus, its valuation is compelling after WU share price sold off dramatically over the past year; it’s down 40% over the past twelve months. 

When we ran the numbers, the upside for Western Union was 61.9% to a fair value of $17.43 per share. Analysts are usually more optimistic than we are but in this case they run more pessimistic and place fair value at $14.36 per share, suggesting closer to 40% upside. Either way, the stock is undervalued and has a generous margin of safety.

To be clear, this is not a stock that would fit in the portfolio of a growth-oriented investor, but an income-oriented investor will find its dividend hard to pass up, particularly given that its payout ratio is 40%, suggesting that it is quite safe.

Other factors in favor of the company include:

1. Growing demand for cross-border money transfer services: As globalization persists, the demand for cross-border money transfer services is also growing. Western Union’s extensive global network and expertise in currency exchange positions it well to capitalize on this trend.
2. Strong brand: Western Union is a trusted and well-established brand in the money transfer industry. Its reputation for reliability and security has helped it to maintain its position as a market leader – it commands a 17% share of the remittance market.
3. Revenue diversification: The company has diversified its business beyond money transfer services to include bill payments and money orders. This helps to reduce its reliance on any single revenue stream and provides additional growth opportunities.
4. Partnerships: The top brass has formed partnerships with various companies, including banks and digital platforms, to expand its reach and customer base. 

Overall, Western Union is an attractive play for income-oriented investors who are seeking to park capital and earn a highly attractive, fairly safe dividend. And it’s got some potential tailwinds in the form of valuation and high return on invested capital to support its investment thesis too.