Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter.
Like lots of people, perhaps this non-transitory high inflation is throwing you into a tizzy and you’re wondering where to invest to obtain better returns. First, let us point out that this kind of approach can lead to folly, as much higher risk is assumed to try to achieve the goal. There are plenty of charlatans out there who love times like these and will happily take your money with promises that will never be met.
That being said, Benj recently ran a screen of the highest dividend payers in the United States; he was sitting on U.S. dollars that were earning a tawdry amount of interest. Over the past number of months it has become relatively easy to invest at higher yields without taking on undue jeopardy. From that list, Benj quickly eliminated the stocks paying more than 10 per cent. If such turbocharged yields could be maintained, returns would be excellent, but he wanted a better margin of safety.
One stock that jumped out at him, and purchased at US$14.81, was an oldie but hopefully goody – Western Union Co. (WU-N), founded in 1851 and stationed in the rarefied air of Denver. Providing a yield of better than 6 per cent, with a payout increase every year since 2006, this enterprise can be classified as a dividend aristocrat. Looking forward though, the question is whether this pattern is sustainable, and whether the enterprise will even be able to keep the payout at this level.
Certainly, in some ways this corporation, which completed the first transcontinental telegraph in 1861 and offered one of the first charge cards to consumers in 1914, seems like a bit of an anachronism. Yet it remains exceedingly active, with more than 500,000 agents and until recently, operations in every country except Iran and North Korea. The digital platform averages 24 transactions a second moving money and payment around the globe. Yes, there is still a whole bunch of action happening.
But ultimately, less so than previously. While annual revenues have exceeded US$5-billion in nine of the past 10 years, this most recent quarter saw a drop of 4 per cent on a constant currency basis. About 3 per cent of this was attributable to pulling out of the Russian and Belarusian marketplaces. Still, adjusted earnings a share in the fiscal second quarter was 51 US cents, compared with 48 US cents a year ago. Looking forward, management lowered the revenue forecast, partly the result of losing a key retail agent, with another expected to depart later in the year. Even with those challenges, the operating profit margin is expected to improve.
Management is not sitting still. Devin McGranahan, who has been chief executive for less than a year, has been analyzing operations with his leadership squad. Changes have been implemented and more are forthcoming, some of which will be revealed at the Investor Day on Oct. 20.
Right, but what about the sustainability of that dividend? One major factor supporting this, but certainly not conclusive, is that the shares outstanding shrank from about 634 million a decade ago, to under 383 million today. That changes the dollars needed for the payout dramatically.
Some money was raised in March when WU sold the business solutions division to Goldfinch Partners, a private equity firm, and Baupost Group, a hedge fund. This was not chicken feed, registering US$910-million. That makes us wonder whether other parts of the enterprise might be hived off, or the whole enchilada sold.
A few concerns worth noting for those considering this stock. The debt load is not light, at about US$2.7-billion. It is unfortunate that management did not pay it down given the regular profits. That could come back to bite hard with rising interest rates. In addition, the current ratio is less than one, while the book value is a lowly US$1.16, making the market cap of about US$5.6-billion seem fat. Plus, insiders hold only about 1 per cent and have been sellers over the past year.
In addition, WU used to be pretty much the only game in town for sending money abroad. But now the moat has washed away and monsters such as Google, Facebook and Alibaba Group all have money transfer options. The market is taking notice that Western Union’s long history of dominance doesn’t mean much in today’s new competitive market.
Still, Benj remains optimistic. The initial sell target has been set at US$25.54. He will patiently sit back with this one, clipping the relatively fat dividend, while anticipating it will be maintained. And hoping that the stock price will appreciate handsomely to where it traded in 2019 and 2021.