Western Union Still Has Big Growth Opportunities Abroad

Source: Company

Western Union (NYSE: WU  ) satisfies a vital need for people around the world: With its international branch network, Western Union facilitates quick, affordable and reliable money transfers for consumers and businesses.

Western Union benefits from increased transaction growth, an increasingly globalized word with large foreign worker communities, a solid market position in emerging markets in Asia, Africa and the Middle East and strong earnings prospects going forward.

Background
Western Union is a financial services company probably best known for its fast, international person-to-person money transfers.

Generally speaking, Western Union makes money on two key services: Transaction fees (that is, taking a cut from the amount send through its international branch network) and foreign exchange fees.

In the first quarter of 2014, Western Union achieved transaction fees of $988 million which accounted for 73% of total revenues. Foreign exchange revenues stood at $329 million and represented 24% of total first quarter revenues of $1,351 million.

Western Union remains reliant on customers who need to send money quickly, and often internationally. In fact, Western Union has a massive competitive advantage compared to regular banks, as its branch network facilitates quick and easy money transfers around the world.

Source: Wikimedia Commons

Developing countries increasing in relative importance for Western Union
80% of Western Union's Q1 2014 revenues originated from the consumer-to-consumer business while the company has an extraordinary strong market position in developing countries which often do not have an efficient and reliable banking sector. In addition, many workers abroad use Western Union to send money home to their families.

Western Union's transaction growth has been strongest in the most recent quarter in Europe and CIS with 10%, but the Middle East/Africa and Asia Pacific regions followed closely with transaction growth rates of 8%.

Website-based transactions also saw significant growth, though the overall importance of this pathway for money transfers remains relatively low with a 4% share of total consumer-to-consumer revenues.

Source: Western Union First Quarter 2014 Earnings Presentation

Going forward, I expect the North American share of total revenues (now 19%) to decline whereas the Middle East/Africa and the Asia Pacific regions should increase in relative importance. This is mainly due to stronger transaction growth which ultimately will be reflected in a larger percentage share of revenues.

Moreover, many countries in these two geographies have a large groups of foreign workers and expatriates who utilize Western Union's services for remittances. The market for remittances is expected to grow strongly over the next couple of years and should aid Western Union's earnings growth.

Source: Western Union William Blair & Company's Growth Stock Conference Presentation

Focus on shareholder remuneration
Investors can quickly get a feeling about a company's remuneration policy by looking at its historical remuneration record.

Western Union certainly is a shareholder-friendly company. The financial services company has funneled back substantial amounts of cash to shareholders: From 2010-2013, Western Union has returned 77% of its operating cash flow to shareholders either in the forms of dividends or share buybacks.

In fact, share repurchases accounted for 74% of funds returned to shareholders and Western Union's appetite for its own stock shows no signs of fading: In the first quarter of 2014, the global leader in money transfers repurchased another $180 million worth of its own stock (and paid another $68 million in dividends).


Source: Western Union William Blair & Company's Growth Stock Conference Presentation

The Foolish Bottom Line
Western Union is practically a bet on increasing global trade, an increasing number of people working abroad and sending money back home and transaction growth momentum in developing countries.

Western Union continues to face extraordinarily attractive growth prospects in the Middle East/Africa/Asia which should lead to further transaction and fee growth going forward. Higher revenues and earnings should further support Western Union's shareholder remuneration.

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