Western Union (NYSE:WU) did little to impress the market with its third quarter earnings report. The underperformance led WU stock to drop more than 3% for the day and knocking it down 6% so far this year. Over the past 12 months, the credit and banking services stock is down 16%.

Despite the market’s disappointment with Western Union’s results, there is good reason to believe the financial stock can make good on its turnaround promise. Because the company still possesses significant scale and market share in many of its most important businesses, Western Union should be able to stabilize its operations and eventually return to growth.

In the interim, investors can continue to collect this ultra-high-yield stock’s dividend that currently yields 8.4% annually.

24/7 Wall St. Insights:

• Western Union (WU) has been largely abandoned by the market as competitive pressures grew following its pandemic-era peak.
• Yet the money transfer and financial services stock offers a compelling turnaround story that looks more attractive with a dividend sporting an ultra-high yield.
• Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “2 Legendary High-Yield Dividend Stocks“ now.

Not all is what it seems

The third quarter was a bit of a letdown for Western Union. Revenue of $1.04 billion fell 6% year-over-year while GAAP net income surged 55% to just shy of $256 million. On an adjusted basis, however, profits were up by a more muted 7% from the year-ago period.

By that same measure, revenue wasn’t as bad as portrayed. Because it benefited last year from a one-time influx of revenue from Iraq when the country changed its monetary policies to ban transactions and withdrawals in U.S. dollars beginning Jan. 1, 2024 to fight money laundering, it skewed the results. 

Removing that burst of revenue from the equation shows revenue rose 1% and Western Union actually enjoyed modest sequential growth.

In particular, the company’s digital channel is coming on strong. It reported a 9% increase in branded digital offerings as transactions jumped 15% from last year. Both metrics rose 20% from the second quarter.

Importantly, the segment now represents 25% of total revenue, up from 23% at the end of 2023. Western Union remains the largest money transfer player in the space. Yet it is seeing competitive pressure as more digitally native rivals enter the market.

A rising tide of competition

A whole host of competitors now seek market share in the money transfer business, particularly in cross-border transactions. Where Western Union was once the undisputed leader, it now faces competition from PayPal (NASDAQ:PYPL), Remitly (NASDAQ:RELY), and others.

Yet it is not an easy segment to navigate, as the difficulty PayPal has had following its acquisition of Xoom underscores the tough regulatory environment the players operate in. That bodes well for an established leader like Western Union, particularly due to the influence global immigration policies impart.

Still, person-to-person payments are a fast-growing market and Western Union faces more difficulty there from competitors who are significantly larger.

Although its consumer-to-consumer payments segment has made a remarkable recovery, revenue growth in the segment was up only 4% year-over-year.

Rewarding shareholders for their patience

Management is focused on stabilizing the overall business, which could inhibit Western Union’s immediate growth. But with the company needing to reinvest little into its operations, it is encouraging the company continues to return value to investors through share repurchases and dividend payments.

Over the first three quarters of 2024, Western Union has paid $239 million in dividends and bought back $177 million worth of stock. It has focused on raising the dividend with the payout rising at a 6.5% compound annual growth rate for the past decade.

With a payout ratio of 55%, the dividend seems secure and additional increases can be afforded.

Key takeaways

Western Union will be lapping the impacts of Iraq’s policy changes next quarter, which will allow a better apples-to-apples comparison of the business. It also possesses substantial global scale that can’t be ignored and will be difficult for rivals to match.

It does face some domestic competitive issues and the market has soured on WU stock. It is that degree of negative sentiment that brings out the contrarian in me, making its shares and the ultra-high-yield of its dividend an intriguing and attractive turnaround play.

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