Why I'm Dumping My Shares of Western Union

Despite Western Union's areas of strength, including a recent share buyback program and a strong dividend, I believe the recent news of Wal-Mart entering the money transfer business is very bad news for Western Union. Here's why.

Apr 22, 2014 at 7:05AM

Western Union (NYSE:WU) just got another bump in the road. News broke on April 17 that Wal-Mart (NYSE:WMT) is now making a foray into the money-transfer business, directly threatening the operations of both Western Union and MoneyGram (NASDAQ:MGI). Why is this such good news for Wal-Mart and pretty bad news for more traditional money transfer companies?

A brilliant move in true Wal-Mart fashion
Normally, I would not be too concerned over another competitor entering a market of one of my stocks, much less sell my holdings. However, Wal-Mart's new presence in the money transfer industry will be a game-changer, if Western Union and MoneyGram's large declines in stock price are any indicator. 

Wal-Mart has traditionally done well with an aspect of its business model in discounting or significantly undercuting competitors, and that strategy is continuing to be followed with Wal-Mart's new money transfer initiative. Wal-Mart's money transfer service will be, on average, a staggering eight times less than Western Union and MoneyGram's fees. There will be no competitive reason for customers to choose Western Union and MoneyGram when they have a much less expensive option right down the street at their local Wal-Mart.

For example, Wal-Mart customers will be able to transfer up to $50 for a fee of $4.50; this compares to fees of $4.75 and $5 at Western Union or MoneyGram. Transferring $900 will cost $9.50 at Wal-Mart, compared to $73 via MoneyGram.

This move isn't only bad for Western Union and MoneyGram, however; it is also a great marketing tactic on Wal-Mart's part. As Wal-Mart has suffered a decrease in regular shoppers, moving into money transfers will help drive customers to the store and drive up sales. By getting people into Wal-Mart's doors, people who will only be planning on doing a money transfer may also want to impulse buy that shiny new video game on display.

As Ben Jackson, a senior analyst at Mercator Advisory Group, stated:

This is an extension of Walmart's larger financial services strategy. It's adding one more service to form the full sweep of basic financial services offerings. If customers are able to make financial transactions in a Walmart store, then they're more likely to stay and buy something too...The big strategy is capturing people's wallets as soon as they are filled. If a customer's wallet is filled at a Walmart store, then it's likely the customer will do some incremental shopping there too. 

While the new revenue stream from this initiative may not be too large, the important factor that drove Wal-Mart to do it was the notion that launching money transfers will help bring customers to stores and thus increase revenues. 

Caution: Rough seas ahead
The news about Wal-Mart isn't the only concern I have about Western Union and MoneyGram. Western Union's normally stellar operating margins and free cash flow have declined in the wake of increasing compliance costs. The government has started to become more vigilant about cracking down on money fraud, so money transfer companies have naturally had to pony up to be in compliance with federal edicts.

Both Western Union and MoneyGram are highly reliant on the money transfer business, while Wal-Mart is highly diversified. According to Forbes: 

For Western Union in particular, consumer to consumer transactions, like money transfers, are a core business making up 80% of its annual revenue. MoneyGram says global money transfer and bill payment services are its primary revenue drivers as well, accounting for 95% of total fee and other revenue. 

MoneyGram's stock specifically seems to be overvalued in comparison to its growth prospects. The market correction on the company's stock seems to be an indicator of this. The Wal-Mart news is hitting MoneyGram particularly close to home, as MoneyGram is currently a service offered in Wal-Mart stores. If Wal-Mart decides to boot MoneyGram in favor of its own service, MoneyGram has just lost considerable market exposure.

Not all is doom and gloom with the news, however. Wal-Mart's move will only be rolled out in its United States physical locations, which is a small solace to both companies as they have large international and Internet presences. However, despite Wal-Mart's proposal only being in the United States, I believe that it is a significant enough measure to warrant caution for Western Union and MoneyGram shareholders. It's also a large enough bump in the road for me to part ways with my Western Union stock.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Evan Buck owns shares of Western Union. The Motley Fool recommends Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers