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Buying another company when there’s a recession looming usually doesn’t make much sense.
This deal, assuming it goes through, does.
Western Union (NYSE: WU) may have made its name in the telegraph business, but by the time telegrams went the way of the dodo in 2006 it was already the biggest player in the money-moving business.
Western Union has about 500,000 locations in more than 200 countries, allowing customers to send and receive money by phone, in person or through the Western Union website. Depending on how the money is moved, the company typically charges about $11 per $100 sent.
That makes Western Union a dependable cash cow and, thanks to its generous dividend yield of 3.9%, popular with income investors.
The problem is that the money transfer business is extremely dependent on the health of the economy. When there’s a deepening recession and high unemployment, people just don’t have the money to send. That’s especially true of migrants sending money home.
Analysts at Citi project that the amount of money migrants send home could fall by as much as $100 billion over the next year. The World Bank estimate is much more dire; it predicts a 20% or $142 billion decline compared to last year. That’s the steepest fall since money-transfer tracking began in 1980.
Considering that forecast, it might seem like a strange time for Western Union to make an acquisition, but it seems to be thinking of doing just that.
While we don’t know the details, Western Union has reported made a bid for MoneyGram International (NASDAQ: MGI).
MoneyGram is Western Union’s biggest (but smaller) rival, with thousands of its own locations in just as many countries and charging similar fees. That said, MoneyGram has arguably made more progress in the digital payment space.
When you stop to think about it, it actually makes perfect sense for Western Union to make a play for its rival right now.
The recession isn’t coming out of the blue and, over the past year, MoneyGram’s shares have fallen from a 52-week high of nearly $7 per share to about $3 today.
That means Western Union can get a heck of a deal.
On top of that, knowing that the entire market you’re in is going to shrink, the best way to maintain your earnings is to get a bigger piece of the market.
On top of that, you can cut costs by eliminating overlap between two companies, improving efficiencies and helping prop up earnings.
So, if you’re a dividend investor, this merger could make perfect sense if it gets done.
Here’s to Profits,
Ben Shepherd