Western Union's Downside Risks May Be Overlooked

"WU is a stable business that is operating well under capable management. While we do not have a smoking gun, given the 1.5 turn (15 percent) expansion in the multiple we are concerned about potential downside risks," analyst James Friedman wrote in a note.

Friedman, who cut WU to Negative from Neutral, noted that the Middle East Africa remittances could fall 6 percent in 2017 as Saudi Arabia is weighing billions of project cancellations. Notably, MEA accounts for 18 percent of the company transactions.

Related Link: Morgan Stanley Doesn't Accept Western Union Or Paychex, Remains Underweight On Both

"Fewer projects likely lead to lower remittances: MEA declined -3 percent in 1H '16, and we are now modeling Middle East and Africa to decline a further -6 percent in 2017," the analyst continued.

"We also note that FX spread revenue is increasing. And with the payout ratio nearly doubling, meaningful dividend expansion appears unlikely," Friedman continued.

As of second quarter, Western Union has a dividend payout ratio of about 38 percent based on a quarterly dividend of $0.16 and EPS of $0.42. As of September 16, the company's dividend yield was 3.2 percent based on a share price of $20.32 and the consensus 2017 dividend estimate of $0.64.

For 2017, Friedman expects revenue of $5.43 billion, which is below consensus of $5.56 billion, and EPS of $1.62 below consensus of $1.73. The Street has Western Union revenue up 2 percent next year.

On the tax front, Friedman thinks the current 12 percent tax rate "seems less than perpetual."

Shares of Western Union closed Friday's trading at $20.33. The analyst has cut the price target by $3 to $17.

At time of writing Monday, the company was seen trading at $19.94, down 1.92 percent on the day.

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