Western Union: Acquires payment industry leader with 8% dividend yield (NYSE:WU)

research summary

Today's analysis focuses on some well-known names when it comes to sending and receiving money that have been around since the 19th century.

western union (New York Stock Exchange: Kure) Recently, the financial results release date for Q2 2023 has been set. in late julySo let's take a look at some of that data.

Here are some important points about this company from its official website. Founded in 1861 as a telegraph company and listed in 2006, it has a network of over 500,000 retail agents and digital options for remittances worldwide.

In fact, I personally “simulated” an online money transfer on the website and was impressed by the ease and simplicity of the platform, which appears to incur transaction fees for each transfer.

Evaluation method

I look for dividend opportunities and value plays among tech, financial, and innovation stocks.My rating analysis is categorized as rating 5 categories:

Valuation, dividend yield, net income growth, capital and liquidity, stock price.

To earn a “hold” rating, a stock must win in three out of five categories, and to earn a “buy” rating, a stock must win in four out of five categories.

Rating: Recommended

It's easy to see why this stock received an 'A' grade for Forward P/E from Seeking Alpha. At a price-to-earnings ratio of 7.20, it underperforms the sector average by more than 30% on this metric, as the sector's price-to-earnings ratio hovers at just over 10.

In terms of price-to-book value, the situation is not so rosy. Earned an “F” grade with a P/B of 5.97. This is 456% higher than the sector average, which is just over 1x his reserve price.

However, upon further investigation, it appears that this is not unique to Western Union; two other companies in the same industry also have overvalued reserve prices. Consider that payment processor Euronet Worldwide (EEFT) has a forward P/B ratio of about 152% higher than the sector average, and Nuvei Corp (NVEI) has a forward P/B ratio of 100% higher than the industry average. .

So in this case, I would recommend this stock based on its attractive price-to-earnings valuation, although I would prefer a much lower price-to-earnings valuation, somewhere between 1.0 and 1.05. You can almost pay for it. Looking at this metric alone, 6x book value seems high.

Dividend yield: Recommended

Yes, I had to look at it a few times to confirm, but this stock does indeed have a dividend yield of close to 8%.

As of August 5th, the yield was 7.87%, and the dividend was $0.24 per share, paid quarterly. In fact, you can take advantage of the next expiration scheduled for September 14th.

Additionally, it has a history of increasing dividends over the past five years, as per the chart below. The annual dividend will increase from $0.76 in 2018 to $0.94 in 2022, an increase of 24%.

Additionally, quarterly payments have been steadily increasing since 2020 without ever being reduced or interrupted. This can provide recurring income for dividend investors looking for quarterly income.

Considering that the average dividend yield for the sector is around 3.5%, this stock beats the sector average by more than 121% when it comes to dividend yield, which is quite impressive.

Needless to say, I think this stock should not only be recommended as a quick pick for dividends, but also deserves to be in the top 3 for dividend yields I've found so far this year.

Net income growth: Not recommended

We're paying attention to the company's year-over-year growth trend in net income. A quick look at the income statement shows that both net income and earnings per share have declined year-over-year since the most recent fiscal year.

Additionally, adjusted earnings per share were flat year-over-year, but down a few cents on a GAAP basis.

In trying to understand what the driving forces are behind this decline, the company's Q2 comments shed some light on this situation.

The year-over-year decrease was due to lower operating income, including charges related to the current period's operating expense reallocation program.

Nevertheless, if you look at last year's income statement, you won't see any long-term upward trend in net income, but rather it's quite volatile.

At this time, I do not recommend this stock in the category of year-over-year net income growth, which is an important metric to consider when evaluating whether a company can successfully manage both revenue and expenses over several quarters. .

Capital and Liquidity: Recommended

Analysts and investors are interested in whether the business remains solvent, so let's take a look at some of the key financial metrics from Western Union's Q2 earnings presentation.

On the positive side, the company has operating cash flow of $264 million, can pay out $176 million in dividends, and boasts a cash pile of $1.59 billion. is by no means small.

We then look at whether the company consistently maintains positive equity, and any signs that it is effectively managing its balance sheet.

Based on the metrics above, the company has assets of over $8.4 billion, debt of over $7.8 billion, and positive equity of $627 million, with a tendency to maintain positive equity over the long term. I understand this.

Please note that this is not a bank, so we do not use metrics such as CET1 ratio or liquidity coverage ratio. Therefore, in this case you can only use the traditional balance sheet.

At this point, I think the stock has a good capital and liquidity outlook.

Stock price: Recommended

As of August 5, when this week's market had already closed, the stock was trading at $11.94, about 5.5% below its 200-day simple moving average.

This stock is recommended as it is close to my trading range of 5% above and below the 200-day SMA.

My investment idea is to track the stock price and the 200 day moving average. Here is an example of a simulated trade using this system.

This investment simulation for Western Union stock involves purchasing 100 shares at the current stock price of $11.94, holding them for one year, earning full-year dividend income, and achieving a dividend yield of 8.04%. He would then be sold for 5% above his current 200-day moving average, resulting in a capital gain. The total return on the amount invested is 19.18%, which is not too bad in my opinion.

Of course, this idea depends on whether the moving average works in your favor, but it may not, and unrealized losses may occur. This is why I took a “long-term” approach to this stock. We believe that in the long run, we will eventually overcome the paper losses and return to good selling prices.

Of course, this opens the door to topics such as capital gains tax and tax on qualified dividends, which are beyond the scope of this article, but readers are encouraged to explore further with their tax advisors nonetheless. is needed. This section details the implementation of a structured framework for thinking about this stock and how it can benefit your portfolio.

Rating score: Purchase

Today, this stock received a buy rating, scoring four out of my five rating categories. This is in line with the Seeking Alpha analyst consensus, but is more bullish than Wall Street and SA Quant System sentiment, as shown below.

One of the reasons why we did not receive a strong buy rating was that net income did not increase year-on-year.

Risks to my outlook: Recession risk

The risk to my moderately bullish outlook for Western Union is that an even bigger recession could occur in 2023 and 2024, which would reduce payment volumes and impact Western Union's trading revenue, which relies heavily on payment transactions. It is about giving.

This risk is highlighted in a February 2023 article by The Payments Association.

In a typical economic downturn, payment providers expect transaction volumes to decline and profitability to decline as customers rush to save. However, there is debate among industry experts about how much the recession actually affects customer behavior.

However, this article adds some speculation to the topic and does not predict specific conditions under which this scenario will actually occur.

The consensus among most industry experts is that the 2023 recession won't result in a pandemic-like drop in payments. However, this prediction is based on patterns over recent months. The actual impact on consumers and the industry is difficult to predict and will probably not be felt until 2024 or 2025.

My argument against this risk is also tied to the lack of certainty of a recession. In fact, just this week, a CNBC article gave a boost to those who didn't expect a major recession.

Predictions that a recession may be imminent in the U.S. economy have so far not materialized. Now, some experts, including economists on the Federal Reserve's staff, are backtracking on that prediction altogether.

Bank of America reconsiders previous assertion that the economy will enter a mild recession in 2024 due to unemployment and other factors, including growth in economic activity, and “pressure in the right direction” on wages and prices I decided to do it.

Therefore, in terms of the impact on payment transaction volume, I think Western Union will be fine for the time being.

One segment that I think is advantageous is online trading, which is probably more advantageous than retail alone. The following image shows the growing trend of transactions through branded digital segments.

Summary of analysis

Here are the key points we considered today:

Advantages: Higher than sector average dividend yield, stock price 5% below 200-day SMA, strong capital and liquidity position, lower P/E than sector average.

Headwinds: Net income growth declines year over year.

The risk of a decline in payments volumes due to a recession is low, given the evidence from many economists that does not suggest a larger recession is imminent.

In conclusion, I think this stock will beat or exceed expectations in its next quarterly earnings in a few months, as it has in three of the last four earnings. I'm looking for a $0.05 return improvement, which is the average of the last four returns.