The Western Union Company (NYSE:WU) is the largest and most successful money transfer company, and competitive advantages should lead to long-term success. Back in October the market panicked after a disappointing earnings report, sending the stock down about a third to $12 per share. Western Union generates about $1 billion in free cash flow, and at $12 per share the market capitalization was just $7.2 billion.
Unfortunately The Western Union Company (NYSE:WU) wasn’t on my radar at the time and I was unable to take advantage of that absurd price. I didn’t discover the company until January when I wrote about it in an article titled A Bargain Stock Any Way You Slice It, after which I paid $13.94 for my shares. Since then the stock has surged about 23%.
Because The Western Union Company (NYSE:WU) generates far more cash flow than it can possibly invest back into the business, the company pays a solid 2.92% dividend and is aggressively buying back shares. Since the end of 2008 the share count has been reduced by about 23%, and these types of declines should continue.
Even at around $17 per share the stock is still attractive, and buybacks alone can drive sufficient earnings growth. The CEO recently stated that he expects revenue from the digital business to grow from $150 million today to $500 million by 2015, so there’s definitely a growth story here too. Those who wrote off The Western Union Company (NYSE:WU) as a relic made a big mistake.
The past means nothing
For the past decade Cisco Systems, Inc. (NASDAQ:CSCO) has been essentially range-bound, fluctuating between $15 and $30 per share. The stock is currently below where it was at the beginning of 2004. This trend leads people to argue that since Cisco hasn’t done anything for the last decade the stock will continue to do nothing in the future.
This couldn’t be more wrong.
The past has very little to do with the future, especially with regards to stock performance, and those who’ve ignored Cisco Systems, Inc. (NASDAQ:CSCO) missed out an a great opportunity last year. The stock traded as low as $15 per share a little less than a year ago, and has since risen to about $25 per share.
Cisco generates around $10 billion in free cash flow per year. On top of that the company is sitting on $32 billion of net cash. At $15 per share the company’s market capitalization was about $81 billion, and subtracting out the net cash brings it down to $49 billion. Cisco Systems, Inc. (NASDAQ:CSCO), the dominant player in the networking market, was trading at less than 5 times the free cash flow adjusted for cash.
Cisco was a no-brainer, and I was able to buy shares for $16.61 each soon after the stock hit its low. It was an incredible bargain which is unlikely to present itself again. Now, having risen about 50% from my purchase price, the stock is still inexpensive at about 10 times free cash flow adjusted for cash.
Cisco Systems, Inc. (NASDAQ:CSCO) pays a nice 2.75% dividend and buys back plenty of shares, and along with slow but steady revenue and earnings growth the stock is a great long-term holding. You don’t need fast growth to achieve high stock returns, you just need to buy quality companies at low prices. Cisco is a perfect example of this.
The bottom line
With so much excitement surrounding the hot stocks of today boring stocks are often ignored, creating an opportunity for patient investors. All three stocks have appreciated substantially since their respective lows, but each is still reasonably priced and likely worth more than the market suggests. Ignore the noise and stick to the facts, and it will be hard to go wrong.
Timothy Green owns shares of Staples, Western Union, and Cisco. The Motley Fool recommends Cisco Systems, Inc. (NASDAQ:CSCO) and The Western Union Company (NYSE:WU). The Motley Fool owns shares of Staples, Inc. (NASDAQ:SPLS).
The article Don’t Ignore the Boring Stocks originally appeared on Fool.com.
Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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