Weakness in Europe Slows Western Union's Growth

 Western Union (WU) finished 2011 on a somewhat mixed note, although it did make strides in returning to a more normalized growth rate this year. Excluding acquisitions and currency effects, fourth-quarter revenue grew 4% year over year, slightly below the rate the company achieved throughout the first nine months of the year. While the company continued to see strong growth in Asia and results in the Americas were solid, slower growth in Europe acted as a bit of a drag and was the main driver of the modest growth compression. The company did achieve stronger growth outside its core cash money transfer business. Its business-to-business segment grew 13% year over year excluding acquisitions, justifying the company's investment in this area. Additionally, its electronic channel revenue grew 36% year over year. This supports the idea that the company is successfully participating in noncash money transfers, although it should be noted that electronic channels remain a very small part of Western Union's business and the industry. Excluding one-time charges, operating margins in the quarter improved modestly to 25.0% from 24.5% last year, but were basically flat for the full year.

While the fourth quarter came in about as expected, the company was cautious in its outlook for 2012, given weakness in Europe. While the market may take this negatively, management has been conservative in its guidance in the past and significantly outperformed its initial 2011 guidance. Europe could grow into a greater headwind in 2012, but the United States is by far the largest money transfer send market in the world, and we think the company can perform reasonably well even if Europe slides into recession, so long as the employment market in the U.S. continues to improve.

For the year, the company produced a little more than $1 billion in free cash flow. We are pleased to see that company returned essentially all of this free cash flow to shareholders through dividends ($200 million) and stock repurchases ($800 million), despite completing a fairly large acquisition this year. The company's announcement that it would increase its dividend 25% is further confirmation that returning cash to shareholders remains a priority.

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