A Top Dividend Opportunity From an Underrated Stock

Mobile payments are a very hot topic, and investors can get a top tier dividend while playing this part of the market.

Apr 28, 2014 at 2:45PM

Western Union (NYSE:WU)(NYSE:WU)(NYSE:WU) is a very old company, one that has been a leader in money transfers for a long time. The unique angle that Western Union is taking is catering to those that remain "unbanked" (people who have no bank account). There are millions of these people worldwide, and the number could be as high as half the global population.

To tackle that market, Western Union has launched a number of services, including mobile money transfers. And its electronic-based sales are seeing strength, as revenue for this segment is up over 30% year over year during the fourth quarter. 

Western Union's dividend yield is currently up to 3.2%, and it has managed to increase the annual dividend payment each of the last five years. In addition, its dividend payout ratio is below 35%. Analysts expect the company to grow earnings at over 10% over the next five years

But competition in the payments market is fierce
Western Union was down last week after Wal-Mart decided to get involved in the payment transfer business. The retail giant is launching a new service to allow customers to transfer money to-and-from Wal-Mart stores.

However, investors shouldn't be too worried as Western Union is focusing on developing countries overseas. Over 80% of its consumer-to-consumer business is generated from outside North America. It's setting its sights on the fast-growing Chinese and Indian economies. Western Union is up against lower competition in these markets.

eBay (NASDAQ:EBAY)(NASDAQ:EBAY)(NASDAQ:EBAY) has settled its battle with billionaire activist Carl Icahn. Icahn had been pressuring eBay to separate its PayPal business from its marketplace segment. It remains to be seen whether or not Icahn will stick around as an investor in eBay and help the company unlock shareholder value.

eBay is still one of the key players in the payments market thanks to PayPal. eBay also has Bill Me Later, which allows customers to buy now and pay later. Together, its payments segment accounts for over 40% of revenue. eBay stated that total mobile payment volume went from $4 billion in 2011 to $13 billion in 2012 to $17.9 billion in 2013.

But concerns remain over its marketplace segment. There are also potential issues with sales taxes on Internet sales that could put a strain on its marketplace sales.

Who could be hurt worse than eBay?
Although eBay's Marketplace segment might be dragging the company down and not allowing management to focus on growing the payments business, there's one company that might be hurting even more.

Global Payments (NYSE:GPN)(NYSE:GPN)(NYSE:GPN) is a lesser-known player in the payments space. Its model includes processing electronic transactions. One fear for Global Payments investors is that mobile payments will begin to push card usage to the side, which would be bad news for Global Payments' business model.

It does have a stranglehold in international markets, which could help the company grow in the interim. But long term, investors would be best served by a bank buying Global Payments for its fee-based business. That's also because the number of data breaches have been rising. It would be easier for Global Payments to combat this with the help of a big bank. Just last year, Global Payments had a security breach. There were hundreds of thousands of cards affected. And shares of Global Payments are already up 40% year-to-date and trading at nearly 52-week highs. 

How shares stack up
Western Union trades at a P/E of under 10 based on next year's earnings estimates. Meanwhile, eBay trades at a 16 P/E and Global Payments at 15. When you couple Western Union's cheap valuation and the growth expectations that analysts have, its P/E to growth ratio is 1. This makes Western Union an even more compelling investment. You don't get a dividend with eBay, and the yield on Global Payments' shares is only 0.1%.

Bottom line
The shift toward mobile payments is very real. The one company that remains at the forefront of the payments industry is Western Union. For investors looking to play the global payments market, Western Union is worth a closer look. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends eBay and Western Union. The Motley Fool owns shares of eBay. 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.

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