Western Union (WU)
Digital Last
Why would we not love a company whose stock yields 10% and that is buying back shares? In a nutshell, because Western Union (WU) is uncompetitive in a digital economy dominated by major platforms such as PayPal. WU is an old-economy company living in a new economy. We believe that building an edge risks diving back into the money laundering for which the company was fined $586 mln in 2017.
The principal reason to use WU instead of PayPal or Wise for cross-border payments or Venmo or Zelle within a single country is because the sender or recipient of cash lacks a bank account, and WU enables customers to send or receive cash on the barrel. But the number of the unbanked is steadily declining, and government scrutiny on cash transfers has intensified. After a decade of growth, money transfers are now in a period of contraction characterized by a shift toward digital platforms and away from cash.
WU offers stored-value cards, which must be issued with caution, as they are an infamous means of delinking cash from bank accounts and carrying it over borders.
Two acquisitions, of Eurochange and Intermex, are being paraded as beacons of growth in WU’s legacy core business. But WU’s disclosures on Eurochange’s acquisition financials are poor, and there are questionable transactions in Intermex’s recent financial statements, adding to our concern that WU is tying together three stones and hoping they will float.
A final problem is falling U.S. immigration. WU relies heavily on remittances from migrants for its revenue, and the United States represents 35% of revenue to the dominant Consumer Money Transfer (CMT) segment. This is down from 39% a year ago and is likely to continue dropping, as the U.S. dramatically reduces immigration and tightens up compliance.
Share buy backs have not been able to offset a trend of falling underlying earnings per share. That also means the dividend does not look sustainable. Structurally, this business is in decline, and there’s no reason Western Union should magically become competitive with Venmo.