Market Commentary: Is $1 Billion A Year Enough?

Imagine I could reveal to you a stock that generates a cool $1 billion of income a year on revenues of $4.4 billion? That’s right a company that is so profitable it regularly reports 10-figures of profits, and now what if I told you the market values it at less than 1x sales, would you be interested?

But wait, there’s more. The stock in question is not only highly profitable and trading at a P/E below 1 but it’s also got a rock bottom price-to-earnings ratio of 5.8x and a sky high dividend yield of 7.9% too.

Got your curiosity piqued?

Key Points

• A legacy stock with a billion dollars in annual operating income and a billion dollar share buyback is on sale now according to a valuation analysis.
• Income seekers may find the dividend of almost 8% to be compelling in light of analysts’ views on the upside now.
• A low p/e and p/s ratio now might be sufficient to counterbalance the business model and competitive threats.

Is This Highly Profitable Stock a Good Bet?

When you stumble across a veritable goldmine in the stock market you always have to be a bit cautious as to what the “gotcha” might be. In the case of the company described above that smoking gun is best described as competition.

You see, the company in question is Western Union and it is a profit juggernaut, regularly posting $1 billion in operating income. The drawback is sales aren’t really growing at all. Worse, they have been falling slowly, and remain lower than where they were a decade ago.

The sales decline is partially business model related (physical locations versus online) and also due to competition (mobile apps). With online upstarts like Remitly and World Remit eating into WU’s lunch by making it as easy as a push of a button to transfer money, the legacy money-sender is at risk of going the way of the dinosaur.

For those who are looking for income, though, there’s a lot to be said for this old stalwart.

Why Buy Western Union?

For bargain hunters, Western Union is more than intriguing. Beyond the low PE ratio, WU has an attractive valuation when a cash flows analysis is performed. It appears substantially undervalued, in fact, to the tune of almost 45%.

Even analysts are upbeat about the firm’s future prospects with a mid-$13 price target on the firm, which suggests a pretty good margin of safety following this year’s pullback, underperforming the general stock market by approximately 35%.

Most compelling of all, however, is the dividend yield that is approaching 8%, not only because it’s so high but also because the payout ratio would suggest that management has a lot more fuel in the tank to increase it should they wish to do so.

And then there’s the management buyback in place, which represents the equivalent of approximately one year of operating income, or in other words, $1 billion.

The question for investors is whether a cool billion dollars in operating income and buybacks is enough to get the share price started on the right track again, leading to an upward trajectory.

With such a significant underperformance compared to the market in 2023, it’s quite possible that most of the bad news is priced in and share price declines will not offset future dividend payments, at least a valuation analysis would suggest that’s the case. Time will tell.