Now, this may not seem great, but remember that this return is solely due to dividends and buybacks and assumes no growth whatsoever and no change in the P/E ratio. The fact that, under this scenario, the dividend more than doubles would likely lead to the stock appreciating significantly more than the 34% due to the buybacks. Right now, the payout ratio is below 30%, and combined with the effect of the buybacks, the dividend can grow by double-digit percentages for years to come without eating up too much of the cash flow. For this reason Western Union is part of The Ultimate Dividend Growth Portfolio.
The dominating company
Being the largest in the industry gives Western Union a distinct advantage. Moneygram International Inc (NYSE:MGI), which holds the number two spot, has nowhere near the margins enjoyed by Western Union. The company posted a loss in 2012 with an operating margin of just 3.9% compared to 23.5% for Western Union. Western Union’s margins have declined a bit due to the lower pricing, but there is still an enormous gap between these two companies. Recently, MoneyGram has been exploring a sale, looking to possibly take the company private.
Xoom Corp (NASDAQ:XOOM), which IPO’d recently, nearly matches the market capitalization of Moneygram International Inc (NYSE:MGI), even though the company is tiny in comparison. While MoneyGram recorded $1.34 billion in revenue in 2012 and is valued at $1.3 billion, Xoom recorded just $80 million in revenue and is valued at $1.1 billion. Xoom shares have nearly doubled since hitting a low earlier this year, but it seems that optimism is the only thing supporting the stock. With Western Union in a dominant position and Moneygram International Inc (NYSE:MGI) unable to be consistently profitable, there is less reason to believe that Xoom has any chance at changing the status quo. Western Union’s online business is growing quickly, and there is nothing that Xoom does that Western Union can’t do.
The bottom line
The Western Union Company (NYSE:WU) is cutting prices in order to stay ahead of the competition, and so far, profits haven’t taken as big a hit as people expected. The company doesn’t expect to cut prices further going forward, so most of the margin contraction should be over. With ample free cash flow and a dedication to returning profits to shareholders, Western Union is a reliable long-term choice. Stocks like Xoom may seem more exciting, but often it’s the boring stocks which give the best returns.
The article An Earnings Beat With Long-Term Potential originally appeared on Fool.com and is written by Timothy Green.
Timothy Green owns shares of Western Union. The Motley Fool recommends Western Union. 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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