Western Union

A Great Opportunity With Some Hair On It

“All investment—whether in bonds, real estate, or equities—comes down to what you are paying relative to future cash flows.”

— Warren Buffett, Interview with CNBC, May 2010

Disclosure: I own shares of Western Union. As my smallest holding, WU comprises of 0.63% of my active equity portfolio and 0.43% of my overall net worth.

Western Union is one of America’s oldest surviving businesses. Its stronghold over the in-person money remittance industry is shrinking as the company grows newer digital branded and consumer services segments. At 4X FCF—adjusted for short-term tax headwinds—it’s priced for bankruptcy.

Most signs point to a goldmine. But the devil’s in the details. After putting forth a convincing bull case, I expose some issues. Lastly, I discuss how I will proceed.

Following my first deep dive on Starbucks, Western Union represents the only other business in my portfolio that lies well outside my typical investment “demographic,” if you will. Typically, I invest in technology and network-defined businesses. But when it comes to investing—as in life—I remain agnostic. I will never understand those who rule out industries and businesses with a preconceived idea that they lie outside their circle of competence. In a world changing faster than ever, pigeonholing oneself is the fastest way to failure.

Despite this, Buffett and Munger are and were, respectively, correct in their assessment that the growth-vs.-value dichotomy doesn’t exist. Every investment requires a rough estimate of the intrinsic value of the asset, which itself is determined by the cash flows that asset will produce (along with, arguably, its terminal value). This is why investors pay up for Palantir while seeking bargains on the likes of Western Union. In the market’s rough opinion, at least, Palantir will produce well over 100X the value (allowing for the crude measure of Palantir’s earnings multiple over that of WU’s).

Regardless of the accuracy of Palantir’s current valuation (full disclosure, I own Palantir), I believe WU’s valuation to be egregiously cheap. A typical cigar butt can often be found for roughly 10X earnings or cash flows. At around 4-5X, WU is priced for bankruptcy, and I think it’s got far more than just another puff—especially considering, going by Q1 numbers, WU is on pace to return 15%—at least nominally—at current prices through a combination of dividends and buybacks.

An Extremely Brief History of The Western Union Company

Western Union was founded in 1851 as the New York and Mississippi Valley Printing Telegraph Company. The company changed its name to the Western Union Telegraph Company in 1856 after merging with several other telegraph companies. There’s a long and truly fascinating history behind not only the beginning of WU but also the telegraph itself. We’ll have to leave this tale for another time.

After creating the first stock ticker, in 1871 WU opened the first money wire service. WU can thank this for their continuing operations today. The first hint of decline came with the advent of the telephone. In fact, AT&T took a controlling 30% stake in WU before being forced to divest of it in 1913 under the Sherman Antitrust act. WU’s telegraph business forged beyond WWII before entering structural decline, with the increasing quality and capability of telephones eliminating the last of its use cases. But the company used its strong profit base to generate new hits in services like the telex and the candygram.

By 1981 Xerox had sold WU for $185 million. By 1987, the company was being rescued from bankruptcy through a junk-bond offering underwritten, naturally, by Drexel Burnham. The new CEO, Robert Amman, sold off the communications businesses, which were asset-heavy, and poured the company’s focus into the money-transfer business that WU is known for today, and the communications businesses were sold back to AT&T for the n^th time. But even the more focused consumer money transfer (CMT) business continued to be tossed around like a hot-potato. Its name was changed while under Chapter 13 to protect the brand.

The company was spun off as a public subsidiary in 2006. By then it was again marching under the original Western Union banners. The business focused on CMT, acquiring other enterprises with varying degrees of success. In the main, WU has been overseen by mediocre management—until, perhaps, today. Devin McGranahan is focused on maximizing shareholder returns and seems to understand how to get there. The first question is whether there’s enough fuel to turn this tanker around.

The CMT business is composed of both brick-and-mortar (in-person; B&M) and digital money transfers (both under CMT). It’s a nice, simple business to understand—in theory. In reality, it’s a morass of geopolitics, sovereign vagaries, and macroeconomic trends.

The Bull Case for Western Union rests on the ability of the cash flows of its core CMT business to fund growth in more sustainable segments. The question is whether WU can maintain its cash cow for the long term, or at least for long enough to mature nascent segments.

As noted earlier, Western Union is far from my portfolio’s typical leading technology and innovation firm. Even Starbucks, an industry leader and undeniably quality business, stands far closer to my collection of other pioneering enterprises and household names. Sure, literally speaking, Western Union is somewhat of a household name, but somewhat for the wrong reasons. Upon sending to my wife’s best friend an early edition of my recently-published portfolio overview—she’s rolling over her 401K upon getting a new job—she indicated near-immediate concern about WU’s reputation as a conduit for laundering and fraud.

And she’s right. A fellow alumni of Sarah Lawrence College, comedian James Veitch, made a career of poking fun of scam emails that attempted to get chumps to send them money via Western Union—which was a virtual pandemic in the 2010s. Yet this doesn’t trouble me much. For one, ChatGPT estimates that illicit activity constitutes less than 0.1% of WU’s revenue. Given that the company has endured the total and near-total cessation of its Russian and Iraqi business, respectively, any crackdowns on such activity are unlikely to be of lasting damage or significance. Secondly, they’ve already been fined for such issues. The fine was quite significant at nearly $600 million, but the likelihood of future fines is quite low. The company has complied with the court’s required measures to prevent and limit fraud moving forward.

All of the above is reputational, which poses a nuanced set of binary questions. Reputational damage either lasts or it doesn’t. Its impact on the business is either significant or it’s not. Though nuanced, the answers to these questions become clearer over time. WU’s reputation is mainly a positive. Otherwise some of the folks who use it would by now have switched to a lower-cost or, if given access, a more convenient provider.

At 12-13% market share, WU sees quite a lot for the taking. Though the in-person business is a melting ice cube, the overall remittance pie is growing thanks to the internet and its related devices. Ironically, it’s the internet that’s giving WU the opportunity to expand, while the lack of internet afforded its core customers keeps its cash cow locked away in an unsavory pen. Access to those core customers allows WU an informal right of first refusal for their digital business.

Milking the Sacred Cow

As late as FY 2024, Western Union relied on brick-and-mortar CMT for 67.7% of its business. At well more than half its revenue, B&M leads many to believe WU is a melting ice cube, period. For the time being, they’re right. Revenue has declined by 13% since 2020. The first quarter of 2025 has not provided as much evidence for a turnaround as management would like us to believe—and yet, I do believe that management has good reason to believe. Digital CMT is regrouping into a growth mode after a rough start. But companies such as Wise dominate the space due to inherently digital models.

But CMT isn’t where WU will find its return to growth moving forward. It's unclear whether WU will be able to stanch the bleeding of their B&M CMT business. On the other hand, in 2020 it was 72.3% of their business. WU is only just beginning to hit its stride in the consumer services and, especially, digital CMT businesses, the latter of which has taken time to grow. Consumer services, detailed later, will likely drive the most growth moving forward—and if WU can simply get back to growth, even if only the low single digits, it’s an absolute steal at $8.48 per share.

In the meantime, they simply need to milk the sacred cow, and keep the old girl alive long enough to birth a young calf. Trading near bankruptcy valuations, the question is whether I’m willing to buck the trend that Buffett so cogently defined when he said that the problem with turnarounds is that they seldom turn.

Then again, he followed this up by saying, “But those that turn can be great wealth creators.”

Unpacking the Consumer Services Segment

Of WU’s core segments—CMT B&M, CMT digital, and consumer services—the latter two represent their growth story, with particular focus on consumer services. Management remains optimistic on branded digital CMT. But in imputing my qualitative margin of safety, I’m pinning most of my hopes on consumer services.

Consumer services consists of the following:

1. Bill Payment Services: These services allow consumers, businesses, and other organizations to pay utility bills, rent, tuition, insurance premiums, and other recurring obligations through the Western Union network. Especially to WU customers who lack traditional banking access.

2. Money Order Services: Western Union sells and processes money orders—pre-printed, guaranteed-fund payment instruments—that customers can purchase in-person at agent locations. The business has seen steady demand, especially in regions where electronic payments are less pervasive—a running theme.

3. Retail Foreign Exchange Services: At select agent locations—and now through the recent Eurochange acquisition (more on this later)—WU offers currency exchange to walk-in customers. Travelers, small businesses, and expatriates can buy or sell major and local currencies on the spot. This is an exciting segment that offers entrée into a higher-income strata.

4. Prepaid Cards: Western Union issues and distributes reloadable and single-use prepaid debit cards in partnership with card networks. Again, these cards enable under- or outright unbanked consumers to load funds for more versatile use.

5. Lending Partnerships: Through alliances with third-party lenders—e.g. fintechs or regional finance companies—WU provides point-of-sale or short-term loan products to customers at its retail locations. By tapping into its agent network, WU facilitates rapid credit access—often for bill payment or emergency needs—and earns referral fees or revenue-sharing from the lending partners.

I’m wary of lending businesses but by no means refuse to invest if the situation is attractive. For a company like WU, which simply needs to find a way to get back to growth, lending provides another lever that, if pulled conservatively, will result in welcome cash flows.

6. Digital Wallets: WU’s digital-wallet service lets customers load, send, receive, and store funds on a mobile app or web portal—effectively functioning like an electronic payment account. Though a tiny revenue stream at the moment, WU is also reinvesting the float from services such as these (and money orders, etc.) to generate interest, much like an insurance company. We will keep an eye on this.

7. Media Network: This is one of the more important growth segments. Launched in November 2024, Western Union’s media network lets advertisers reach WU’s global customer base through in-branch digital screens, mobile-app placements, and online channels. By tapping into the “commerce mindset” of WU’s mass volume of remittance senders and recipients, the network offers targeted promotions, delivering incremental advertising revenue while cross-selling WU’s own products (e.g. FX services, prepaid cards, etc.).

Where once stood a lone, inert CMT cash cow, we now see WU creating an ecosystem, if not an outright platform. There’s a ton of competition out there—but none of them have direct access to a mass of customers who only know Western Union. As we’ll discuss later, WU’s customers live in countries and regions whose technology and infrastructure growth is deeply stunted. While superficial purveyors of the market use first-order thinking to assume Starlink, Kuiper, or ASTS will turn 2-3G water into 5G wine, it’s not that simple. WU has a captive base that, for better or worse, is stuck with them.

Of the consumer services listed above, we should focus in particular on FX, media, and lending services, in that order. I also believe that their growing float offers a presently invisible lever that will continue to compound exponentially (albeit from a small base). These services are high margin, easily implemented, and require relatively modest injections of CapEx.

The Eurochange acquisition is particularly exciting. In acquiring this London-based FX company WU brings in-house a critical pillar of their FX business. For decades WU’s customer base has largely been composed of emerging-market populations. The FX business exposes WU to a higher-income demographic, bringing these wealthier travelers and businesspeople into their ecosystem and increasing ticket sizes. The acquisition of a former partner raises margins and gives them more control over integrating Eurochange into their ecosystem.

Media networks could one day sit atop the list of consumer service growth drivers. Advertising is one of the most lucrative, high-margin businesses in human history. Furthermore, it brings network effects to WU’s ecosystem—the more customers there are within WU’s ecosystem, the more advertisers want to do business with WU; and the more WU advertises to more people, the more information they have on their customers to then drive more and better advertising. Right now, WU’s ads are often industry-adjacent—leveraging relationships with other banks and fintech firms. But they also partner with consumer brands, telecom, and retail outfits. We will have to keep an eye on this segment to see if WU CEO, Devin McGranahan, can leverage this opportunity successfully.

Of the most exciting new consumer services ventures, lending offers WU perhaps the greatest surface area for growth. As noted above I’m always cautious about investing in lenders. Regardless of the circumstances, it comes down to whether management understands the best practices for lending. I learned this the hard way with my initial investment in Upstart, which is essentially flat after a four-year roller-coaster. All the AI and macro forecasting in the world couldn’t save them from over-lending in the leadup to the inflation and rising rates of late 2021-2022. It’s also a very low-margin business depending on volume and leverage, both of which are as much risks as they are rewards.

WU might in the future be able to lean on a cash pile much in the way an insurance company does to pay their claims: money that’s not theirs, necessarily, but which they can exploit prior to paying out—in their case transferring or returning—to customers. A growing number of platform businesses—e.g. AirBnB, Palantir, and most famously Alphabet—are accruing a great deal of additional dollars to their bottom line by collecting interest. In these cases they have a cash pile working for them, but in the case of Western Union it’s more of a traditional float given that they are investing in short-term securities that are earmarked for return to customers or other partners in one form or another.

Also of interest are WU’s long-term equity and equity-like investments. Most important is the investment in STC Bank.

In November 2020, Western Union agreed to invest $200 million to acquire up to 15% of STC Bank (then known as STC Pay), a leading digital wallet division of Saudi Telecom Company (STC). The deal was finalized on October 12, 2021, confirming Western Union held 15% of STC Bank for the same amount. The investment aligns with WU’s digital growth strategy, enabling them to actively participate in Saudi Arabia's evolving fintech landscape and tap into STC Bank’s rapidly expanding user base (which boasts over 4.5 million users). It also renewed and deepened an existing commercial partnership, allowing STC Bank customers to send money globally—across 200+ countries and 130+ currencies—via Western Union’s mature payments network.

With strong cash flows WU can keep an eye out for further opportunities to grow outside their core competency.

Can management Turn Around the CMT Business Too?

With the bulk of their business still tied up in CMT, any turnaround hinges on stanching or significantly slowing the bleeding. If you take the company’s statements at face value you’d think that they already have. On the contrary, management is far too reliant on adjustment numbers for my liking. I will give them credit where due: their adjusted numbers at times come in lower than the GAAP numbers. But for the most part the numbers remove the elements of the business that are less attractive.

The CMT business has suffered from sudden losses of operational territories—entire countries or regions, namely Russia and Iraq, the latter of which effecting a 9% hit to revenue. Even without these removals, they haven’t stabilized the business, with slight declines continuing in the range of 0-2%. But when you reckon with the danger of continued geopolitical risk—for example the wars in Iran and Gaza and crackdowns on U.S. immigrants—it’s difficult to feel as confident as McGranahan that they are nearing a return to growth. WU has made investments to shore up their existing B&M infrastructure. But this doesn't affect or control for the vagaries of worldwide population movements and geopolitical fluctuations.

We can only wait and see how things proceed on this front. In the meantime I think it prudent to assume that B&M CMT will not only fail to return to growth, but will continue to lose share. The business may be protected by the lack of infrastructure available to many of its customers. But these customers will slowly gain access, and that process may accelerate at some point. We want to assume the worst and hope for the best. The growth story lies elsewhere.

We’ve seen that WU can grow other businesses, particularly digital CMT and consumer services. But we also should assume that in-person CMT will continue to melt. The question then becomes whether WU’s growth arms can outpace the loss of B&M CMT.

Between 2020 and 2024, Western Union’s B&M CMT business has lost an annualized 5%. In fact even their digital CMT business has lost 1% annually, due to a short-term fall while managing the transition from B&M. Overall revenue has fallen at around the same rate because the other businesses were starting at such a small base. However, with revenue ex-B&M CMT at roughly $1.35B in 2024, we should expect digital CMT and consumer services to start steadying the ship. Branded digital will contributed 7-8% in 2024 while consumer services has grown somewhere between 25-30% from 2020-2024, depending on your calculation methods. The longer this process plays out, the closer WU gets to growth. The question is exactly how fast and long WU can grow digital and consumer services.

The math says that we’re reaching that inflection point, if we haven’t already. This is bolstered by the fact that WU is no longer facing the headwinds from Iraq and Russia. If we balance this against the likely loss of further business from the Continental U.S. (CONUS), due to Trump’s policies, we can assume, conservatively, a continued 3-5% loss in the near future.

At a $2.85B base and 5% decline, WU will lose about $134m in 2025. At the same time, they’re slated to gain roughly $200m in digital and consumer services. Factoring in the hit from CONUS, we’ll say they may be able to break even this year—and if they can stop the bleeding within CONUS, and potentially even make gains, it’s very likely that they can return to growth by 2026.

A return to growth would send the stock flying. Research from the legendary analyst Michael Mauboussin shows that the proper steady-state valuation is roughly 12.5X earnings or cash flow. Meaning we should expect a roughly 8% return from an asset that neither grows nor shrinks. WU is currently trading at just over 5X FCF. Add to this a nearly 11% dividend (following the recent Iran war rout) and a $1B buyback program, and it quickly becomes apparent why I’m interested in what many believe to be just another melting ice cube or cigar butt.

And yet.

The last mistake I made was Dollar General. At the time the investment was quite a significant portion of my capital. In many ways DG appeared to be in much better shape than WU. They could (and still can) pull some growth levers. Investments in current stores and the general business model would help bring in more customers and bigger tickets. But the problems with DG had far less to do with the business itself than the management. As Buffett once said, you’re going to want to invest in businesses that any idiot can run, because one day, one will.

DG was a mistake because management (among other smaller mistakes):

v bought back stock in accordance with a preset “algorithm”—one that favored mass purchase of shares at ATHs only to put a total stop to the program at 10-year lows.

v issued an untenable volume of debt that, when including capital leases, I believe is insurmountable.

v chose to ignore investment in their stores until the numbers fell off a cliff; the situation was so bad that there was constant theft, threats to workers’ safety, actual killings of unprotected workers, and fines from OSHA—the majority of stores were being staffed by a single worker at a time.

v and when all of this came to light, they fired the CEO they’d just hired from within their own ranks and brought back the very CEO who’d caused these problems in the first place; this might turn out to be a decent move given his experience, but it doesn’t give me confidence in the culture.

With WU we see a lot of signs pointing the other way. Starting with the last point, McGranahan was brought in to solve the problems that the board duly noticed as arising under the aegis of previous management. Though WU is in far from perfect shape, McGranahan recognizes with clear eyes the issues that need attention and investment that needs to be made, including the locations that need upgrading, where staff needs to be bolstered, and most importantly when and where locations should be franchised or left independent. He’s aware of the debt load and committed to reducing rather than adding to it—though there are problems related indirectly to this that I will get to later. And perhaps most importantly, confident that he can execute the turnaround, he’s aware that the stock price is egregiously low and should be bought back. Rather than sticking to an “algorithm”—which simply means that management is on autopilot rather than thinking for themselves—McGranahan seems to understand that only a dynamic approach and open-minded perspective allows the flexibility to act and react to changing circumstances.

DG is in decline not only because of competition from Walmart and Amazon that has always existed, but because they have lapsed into a culture of complacency and fallen prey to the institutional imperative. My mistake was in failing to recognize the signs and instead falling in love with a business model. One of the biggest chimeras among investors today is the false idea that, to be great, a business must have a tangible moat predicated on a patent, a monopoly, a cornered resource, etc. This couldn’t be further from the truth. One of the best moats—if not the best—is management and culture. I’ll talk about this more when I eventually get to my Hims & Hers deep dive, because it’s clear as day that they have built a culture of excellence that allows you to delegate to management entirely.

Market participants seem oblivious to many of the most important modern-day moats, such as scale and scale economies shared, and marginal product, service, and/or operational advantage. Instead, investors twist themselves into a pretzel trying to rationalize whether a company has a moat that often has little or nothing to do with whether a company will succeed or create value. Rest assured, if a company lacks the right culture and ethos, it’s extremely unlikely that they will do either.

At the least it’s true at least relative to former management. Either way, it doesn’t mean culture has been solved and/or the company is on the right track. We won’t know for many moons. With war breaking out now in the Middle East, the geopolitical situation doesn’t seem to be simplifying, which is bearish overall for WU. At the end of the day, McGranahan has to execute on maximizing earning capacity from both the larger, weakening asset and the smaller, strengthening assets. This isn’t an easy task, evidenced by the fact that most turnarounds fail.

When we look at K-Mart, Toys-R-Us, or Blockbuster, we recognize a common thread: none of these had built or were seriously building additional business segments. Instead, they were complacent, content in the illusion that their cash cows would remain sacred forever. The only companies that survive are those that reinvent themselves or at least spawn additional segments. The question is whether WU has realized this too late. I’m not sure whether it matters that they’ve managed to last for over 150 years. It probably doesn’t hurt.

It remains TBD as to whether McGranahan is the guy for the job. When we dig deeper into the financials, we begin to find some issues with capital allocation that give some pause.

Ostensibly, Western Union returned $496 million to shareholders in 2024. In reality, that number is significantly lower due to financial engineering working against shareholders, at least in the short term. Additionally, we were told that we were on the path to growth. Yet exactly when shareholders will reach the promised land remains uncertain.

Western Union claims to have paid out $496m in cold, hard cash last year—an 18% yield on current prices. Unless revenue declines accelerate markedly, management can pay me back in just over five years. In this case the company is criminally undervalued. If they can return to growth in the process—and therefore accelerate their buybacks—I could get repaid in under five years, only strengthening the bull case.

The thing about those buybacks, though—they’re not exactly what they seem. While conducting my researching I ran into a concerning discrepancy. The company bought back $186m in shares in 2024. At an average market cap of $3.9B over the course of 2024 such a share repurchase volume would indicate about 5% of the market cap. Yet when we look at shares outstanding, 2024 ended just about 1.2% lower than the year prior.

WU advertises at the top of their annual reports the exact dollar value of cash returned to shareholders. Yet this is not in reality the case. Of the $186m used to buy back shares, only about a quarter of such is actually working toward increasing my ownership of the business. I find this to be incredibly unfortunate, inflicting damage on my trust in management that, while not irreparable, is enough to hold my fire on the business for now.

So What Gives?

What I found brings me back to an epigram once delivered by the great Antonio Linares: “If you have to do a DCF, the deal’s too thin.” While I’ve refrained from leaning on a dreaded DCF here—a low I’ll never stoop to—Western Union is a prospect whose intrinsic value depends a great deal more on the financials than my typical technology or early-stage growth target.

The issue with Western Union’s share repurchase program is that, as the above alludes to, the cash deployed on repurchases is not proportionate to the shares retired. Put simply, investors are not receiving all of the cash supposedly being returned to us via buybacks. And the reason for this reveals a far bigger and more dangerous misconception that’s infected the value investing community in particular.

The problem starts with Western Union’s SBC plan. Its existence isn’t an inherent problem. The problem is how it’s utilized.

The SBC problem is exacerbated by the falling stock price. I’ll spare you the comprehensive math and instead use an example. Let’s say it’s the beginning of 2023 and Executive A is put on a share compensation plan that will award them a fixed $100,000 of stock in two years. The share price at the time was roughly $14. Now let’s fast-forward to 2025. Executive A has met the criteria for their award. But the share price has slid to $10.50—a 25% bite out of the company’s value. Because the award is in fixed-value terms, not at all uncommon, the number of shares required to execute the award plan has risen from 7,142 and change to 9,523 and change—naturally, a 33.33% increase in shares required to meet Executive A’s compensation package.

It could be argued that the falling stock price helps retire more shares that aren’t used to fund SBC, and this is true. But SBC alone can’t explain for the massive discrepancy between dollar buybacks and shares retired. A combination of timing, sluicing shares through treasury, and SBC plans is dilutive to the actual repurchase program. But the reason it’s so damaging—and why management is hiding it—is because the stock price is falling.

The Value-Thumper’s Great SBC Hypocrisy

There’s a pernicious irony embedded in the above that I’ll unpack here. Far from a non sequitur, it relates quite strongly to Western Union’s investment prospects. I may devote a deep dive specifically to this subject at some point, depending on the fortunes of exhaustive research. Which is to say, some of this is predicated on personal observation. However, barring severe privations of logic on my part, much of this is basic math.

Unless you’ve been living under a rock, you’ll be aware that Warren Buffett is no fan of SBC. And as Warren says, so the value investing community marches along—hence the proper pejorative, ‘value-thumpers’. Far from flexible practitioners of the craft, these folks are religious and dogmatic and unbending in spite of any evidence to the contrary—no different than the growth-at-any-price radicals. For all of the timeless wisdom within Berkshire’s annual letters—indeed, 99% of what is said would best be taken as gospel—the value-thumper’s tendency to include the other 1% has sent him on a slow match to mediocre or outright poor returns. We can see this, for example, in Adam Seessel’s book Where the Money Is, in which he reveals many reasons why the traditional value analyses require evolution.

But I go further than Adam—further, perhaps, than any man who’s gone before. When it comes to SBC, value investors require more than an evolution—there requires a revolution. What I’m about to purport is not that SBC is inherently good. What I’m positing here is that it’s not inherently bad, either.

Yes, I said it. But it’s really simple math. Take for example a timeless Buffettism: companies should only repurchase their shares when prices are below intrinsic value. This remains as true today as it was when he wrote it (though I do think it’s clear that traditional value investors are often incapable, as Seessel pointed out, of understanding the intrinsic value of many modern businesses). And yet, if repurchasing shares at prices below intrinsic value is good, then why is SBC—which is just another form of issuing shares—at prices around or above intrinsic value bad? (In this we hold any discussion over the forms of SBC and their merits).

Even Buffett condones a young company that responsibly issues shares to further growth. Yet, suddenly, when this issuance is in the form of SBC, it’s a big no-no. This makes sense neither logically nor mathematically. It’s even worse when value investors cite SBC’s percentage of revenue, earnings, or cash flow—all of which is largely irrelevant outside of evidencing plainly how much cash—i.e. growth potential—a company would have had to waste. It’s no different than judging the quality of a buyback by its percentage of revenue.

Let’s take a prime example: Palantir. I don’t think many would argue with me that Palantir is richly valued. Their TTM FCF is $1.32B. Many value investors would throw a tantrum that TTM SBC is $721m. “That’s more than HALF their FCF!” Entirely irrelevant. What’s relevant is what percentage of their market cap it is, and therefore how much they’re actually diluting the business. At $326B and change, they’re diluting at less than a third of a percent per year. At negligible levels of dilution, I would love for someone to explain to me how this isn’t preferable to burning the $721m that could otherwise be used for higher-leverage capital allocation.

Value-thumpers will cite that the dilution is permanent. It’s no more permanent than the dollars that would have been handed to employees, siphoned to SG&A, and, most importantly, funneled into CapEx. And as these dollars feed FCF growth, their ability to buy back shares—and potentially at greater discounts to intrinsic value—only increases.

I’m well aware that many tech companies use SBC indiscriminately. Zoom for example is one of the worst culprits. With what, for all I can see, are dim growth prospects, they continue issuing shares to employees like they’re vending machine coupons. SBC dilutes shareholders by about 4% a year. But far more tech companies are actually using SBC responsibly than value-thumpers would have you believe.

I’ll save the rest of this argument for another deep dive. For now we need to look at the other side of this coin as it pertains to Western Union. As a deeply undervalued business, Western Union is right to be gobbling up as many shares as they can. Except they’re also issuing SBC in lieu of cash that they readily have on hand. It’s the equivalent of a man lost in a desert going for a five-mile run every morning. Worse yet, as shares decrease, increasingly valuable shares are required in ever greater volumes to meet prior SBC commitments. The end result is dilution—precisely that which value-thumpers so adamantly claim to avoid.

Are We There Yet?

The above issues with SBC and effective dilution represent one of two major issues. The other is the lack of clarity and outright disingenuousness on the part of management. In March 2023, McGranahan stated explicitly that the company had returned on the growth path. Though he left some room for interpretation, I think it’s fair to say that this path should have reached it destination inside two years. Yet here we are, still seeking growth.

This in itself isn’t the major issue. McGranahan could hardly have seen the Iraq crisis coming, whereupon, literally later that month, U.S. and Iraqi authorities began cracking down on bank wire transfers between and from Iranian-backed militias, and others turned to card-based schemes to move money. This included smuggling prepaid debit/credit cards into Gulf countries or using merchants for fake transactions—a form of arbitrage exploiting differing exchange rates. Western Union (and MoneyGram) saw a sudden surge in transfers from Iraq—escalating from about $1 billion in March 2023 to $1.7 billion by June 2023.

As a result, U.S. Treasury and the New York Fed pressured Western Union and MoneyGram to shut down accounts linked to Iraqi banks suspected of facilitating the arbitrage. Iraqi regulators also suspended key local agents in October 2023, disrupting WU’s network. These actions triggered a sharp drop in volumes. Aggregate monthly outflows plummeted from $1.7B to around $110 M by October 2024—a roughly 6X reduction.

Yet, despite the obvious hit, McGranahan never formally walked back his prediction that they were on the path to growth. Instead, WU began releasing “adjusted” numbers—i.e. ex-Iraq—that showed growth. Similar to the skewed data regarding “cash returns” to shareholders, management communication here too inveigled investors with financial alchemy—and there are few things I countenance less than clever reporting.

Western Union has posed these numbers alongside GAAP reporting. But the promotional materials would have you believe that things are somewhat better than they are. Far from outright dishonesty, it’s clear that WU wants us to understand that they’ve been blown off track by events outside their control. The effort however slips into the realm of excuse-making and even outright promotion (huge cash returns, return to growth ex-Iraq, etc.) because the fact of the matter is that unforeseen circumstances are the rule, not the exception, in this industry. I’d feel more comfortable if they simply gave us the adjusted numbers alongside the GAAP numbers without encouraging me to weigh one over the other.

Western Union is a business that remains of great interest. I will hold my small position and perhaps add lightly on further dips and continue to track the business. For all of my reservations, I believe the business likely remains vastly undervalued, yet also exposed to unforeseen circumstances.

Far more than the continued revenue declines, the managerial communication and allocation decisions have led me to this decision. Above all I need to trust my management teams. Their job is to allocate capital and communicate clearly and honestly what’s happening operationally, financially, and culturally. Furthermore, even if I’m able to glean a clear picture, I remove points if I feel management has made it more difficult for me than they should.

It’s difficult to wait largely on the sidelines when a business retains so much value. But this is exactly the kind of discretion and patience that, I feel, separates mediocre or even good investors from great ones. When I first began five years ago, despite decades of casual stock knowledge, I was essentially clueless. I’ve put in tens of thousands of hours of work, both systematic and informal, to inexorably approach the other side of the bell curve. All that separates me from that tail is the decision of whether to buy or sell.

The prodigious and largely latent value locked within WU does not warrant outsized changes. While management has not been crystal clear, they have not been dishonest. Outsized changes to their long-term assets—specifically STC—could create further value, but it’s unlikely to compensate for declining revenue. At the end of the day a business is worth the cash flows it produces.

To reverse the stock price they need to execute the turnaround. At that point, the stock price has an intrinsic floor. At some point catalytic dilution will reverse, and everything that was working against will instead begin to work toward WU’s favor. At that point management’s financial massaging will have become irrelevant. I don’t need to time the bottom perfectly, especially because I’m reinvesting dividends as it stands. The business is at roughly 30% of it’s intrinsic value should it reverse the tide.

I will be watching closely. Until next time.