Business


Western Union stays in game with profitable, reliable stock

Move over, paper checks and bank wires. A new way to send money from place to place is catching on in a big way. Meet the online money transfer, which will revolutionize the industry of sending cash from point to point. One of the best ways to invest in this new development is via Western Union (NYSE: WU), which offers a convenient, inexpensive way to send cash to any country you please.

Once, Western Union was the only game in town. But it got too comfortable in its market-leading position and lost exclusive contracts with agents in Mexico while failing to cut prices to thwart competitors elsewhere around the world. Industry rivals capitalized on that weakness.

It hasn’t been the end of Western Union, though. Remember, this company survived the death of the telegraph, so disruptive technology is nothing new. It’s already growing its online business at a 30-percent-plus annual clip.

Western Union still has major competitive advantages. Its network includes 500,000 agents, and it offers some services others don’t, such as two-way money transfers. Its profitability is unmatched, as it turns $0.17 of every dollar in revenue into pure free cash flow (an average of $1 billion in each of the last five years).

With its P/E ratio recently near 11, Western Union deserves a higher valuation. (The Motley Fool’s newsletters have recommended Western Union.)

Ask the Fool

Q: How can it be that via watching CNBC, reading financial magazines and checking out Motley Fool opinions on stocks, I often see one source recommending buying a stock and another recommending selling it? – J.R., Sacramento, Calif.

A: It’s rarely certain that a given stock will rise or fall. Every investor or analyst has his or her own opinion, and sometimes, inevitably, they’re wrong. They can have different focuses, too. Some might seek undervalued stocks, while others will accept a smaller margin of safety in exchange for greater possible growth. Read the arguments, do your own research and make up your own mind.

Q: What’s a “high-yield” stock? – B.S., online

A: It’s one that pays out a relatively hefty dividend, expressed as the dividend yield. Dividend yield is simply the current annual dividend amount divided by the stock’s current price.

If McDonald Farms (ticker: EIEIO) pays $1 per year (typically, it would be $0.25 per quarter) and trades for $25 per share, its yield is 4 percent (1 divided by 25 is 0.04).

Some solid companies, such as Visa, sport low dividend yields. Others, such as Google, pay no dividend at all. That’s not necessarily bad; it just suggests that these companies have better things to do with their money, such as reinvesting it to grow their business. Instead of a dividend, they might deliver relatively rapid stock price appreciation, though that’s never guaranteed. Dividends aren’t guaranteed, either, but with established, growing companies, they’re darn reliable and provide welcome income.

For a long list of promising high-yield stocks, try our “Motley Fool Income Investor” newsletter for free at fool.com/shop/newsletters. (The Motley Fool owns shares of Google and its newsletters have recommended it and Visa.)

My dumbest investment

Twenty years ago, my wife and I were newlyweds and did not have a lot of cash. I talked her into investing $3,000 into one of her friend’s investment funds. We liked him and his wife, and trusted him. He eventually bilked us for the total amount after buying a private airplane (in which we received a short ride for our $3,000 investment) and a house in a warm climate, along with many other luxuries. He took his mother’s only money for retirement and many other friends’ money, too. His monthly reports showed great returns that turned out to be false. We did receive one check for $300. Not close to what we gave away. – G.S., Mankato, Minn.

The Fool responds: Ouch. There are indeed some charlatans out there, such as Bernie Madoff, who also sent his clients falsified reports. One red flag to help you spot such fraudsters is consistent high returns. You can earn high returns in the stock market, but not consistently. There will be good years and bad ones, with the good typically outnumbering the bad.



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