Admittedly, shares in Western Union (WU +0.46%) have been a bit of a yield trap over the past five years or so. During this time frame, the money transmitter has continued to make regular quarterly dividend payments of $0.235 per share.
However, a steady decline in Western Union's stock price has outweighed these payouts. Over the past five years, total returns have come in at loss of 40%, versus a gain of 92% for the S&P 500. But while shares have failed to be profitable for buy-and-hold dividend investors, don't assume this poor performance will persist.
NYSE: WU
Key Data Points
In fact, there are three key reasons why Western Union can, over the next three years, shake off its yield trap reputation and experience a significant leap higher.
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1. Western Union remains profitable, despite disruption fears
With so many online-based cross-border remittance apps and platforms currently in operation, there is the assumption that Western Union, still largely focused on its brick-and-mortar locations, faces the risk of permanent "disruption" from these fintech-based competitors.
However, while online competition has contributed to Western Union's steady decline, the company has remained profitable. The company has consistently reported positive generally accepted accounting principles (GAAP) earnings. Furthermore, earnings have been more than sufficient to cover the stock's quarterly cash dividend. The stock's dividend payout ratio is currently around 55%.
Currently, this dividend gives the stock a forward dividend yield of 10.3%. While I wouldn't count on any dividend growth anytime soon, this high payout is likely sustainable, especially given Western Union's various "return to growth" efforts.
2. There's a lot of promise to the company's turnaround plan
As discussed in its Nov. 6 Investor Day presentation, Western Union has spent the past few years transitioning into a digital-first payments company. It has also expanded into other types of consumer services, including travel money, bill payment, and prepaid card services.
At the same time, Western Union is in the process of acquiring a Latin America-focused competitor, International Money Express. The company expects this deal to be immediately accretive to shareholders. Western Union has also moved into the stablecoin space. This year's planned launch of U.S. Dollar Payment Token (USDPT) could also drive organic growth.
Taking all of these aspects of the turnaround into account, management expects 20% revenue growth between 2026 and 2028, with 2028 earnings between $2.15 and $2.45 per share. If achieved, this could have a significant impact on Western Union's stock price.
3. Collect a high-yield while waiting for tremendous upside
Assuming Western Union's turnaround proves successful, shares will likely not only rise in line with increased earnings. If the company returns to just moderate growth, it could also result in a rerating -- a change in investor sentiment -- in the shares.
Currently, the stock trades for only 5.1 times forward earnings. Even if the stock receives a forward multiple in the high single digits, such as 7.5 times earnings, at earnings of $2.45 per share, Western Union could be trading for around double its current share price within two years.
While execution uncertainty remains a risk, given the stock's high yield and strong upside potential, investors should consider Western Union a buy.
