The best dividend-paying stocks are often familiar names that have been around forever, but don’t get much attention from analysts. And right now is the best time to invest in stocks that pretty much provide investors with a steady stream of income that grows bigger year after year.#-ad_banner-#

Such is the case with Western Union (NYSE: WU), the global leader in money-transfer services. Going strong since the 1850s, the company went public in 2006 when it was spun off from First Data.

Not many analysts pay attention to this stock, but dividend investors should find a lot to like about Western Union. It has a leading market share, 10 years of relatively consistent growth, a business model that produces enormous amounts of cash flow and a firm commitment to returning more of its cash to investors. This is what we here at StreetAuthority refer to as a Retirement Savings Stock. 

Most of the world is familiar with the Western Union brand and millions of people use the company’s services to wire money on a daily basis. Last year, Western Union handled 226 million customer transactions worth more than $81 billion. At present, the company has 510,000 locations in more than 200 countries and territories.

You might be worried that PayPal and other online money-transfer tools are making Western Union’s services extinct, but so far, that hasn’t been the case. In fact, the company has continued to grow steadily, increasing sales and earnings even during the recession.

There are several reasons for this company’s reliable growth. First, Western Union’s customers often don’t have bank accounts or Internet access. Many are immigrant workers who use the company’s services to send much-needed funds home to their families. Also, these customers seek a money-transfer middleman that’s reliable and trustworthy. As one of the world’s best-known brands, Western Union has a global network that is nearly 80% larger than its next largest competitor, MoneyGram International (NYSE: MGI). The company controls 18% of the wire-transfer market, which is three times the market share of MoneyGram.

A major advantage that comes with Western Union’s superior size is greater economies of scale. Western Union’s costs per transaction are lower than competitors, according to management. Because of this, the company has been able to maintain operating margins consistently above 25%. This compares favorably to the operating margins of MoneyGram at just 15%. 

Western Union’s business is also easily scalable, typically providing a rich 17% return on capital (due to low capital costs) and generating more than $1.1 billion of cash flow annually. With fixed costs accounting for less than 40% of overall costs, every incremental transaction adds value to Western Union’s bottom line.

During the third-quarter of 2012, Western Union’s year-over-year revenue improved 1% to $1.42 billion, net income jumped 12% to $270 million and earnings rose 18% from to 45 cents per share.

Despite these strong results, the company business is being negatively affected by compliance-related charges and competitive-pricing pressures in some markets. As a result, Western Union plans to implement new cost-cutting initiatives and reduce its prices in some markets. These are the main reasons for a 5% reduction in full-year 2012 earnings guidance to $1.62 a share and a 10-15% decline in 2013 earnings guidance. Cost-cutting initiatives are expected to pay off, however, with more than $30 million of annual cost savings by 2014.

The stock market’s response to the reduction in earnings guidance was a massive sell-off that dropped Western Union’s share price to a three-year low, as you can see in the chart below. These shares have since regained some ground, but are still priced 25% below where they were just one year ago. 

This sell-off has made Western Union incredibly undervalued. The stock currently trades at a price-to-earnings (P/E) ratio of just 7, which represents a five-year low and roughly one-third of the industry P/E of 20. This meltdown occurred despite a 25% increase in Western Union’s dividend to a new annual rate of 50 cents a share, which yields a generous 3.6%. In addition, Western Union announced plans for $750 million worth of share repurchases that will help to enhance future earnings growth. 

Company insiders clearly see the sell-off as a buying opportunity and have been loading up shares. In November 2012, top officers and directors together purchased 53,660 Western Union shares, currently valued at close to $7.5 million.

Although Western Union’s growth will likely slow in 2013 due to more competitive pricing, analysts say the company could return to 9% earnings gains by 2014 and average 9% growth in each of the next five years. The remittance market Western Union serves is returning to steady 5% annual growth after a brief downturn during the recession. In addition, the company is increasing its market penetration in the United States and Europe, expanding its network in Asia and leveraging new digital delivery channels. Western Union anticipates five-fold growth in its digital business during the next three years and achieving $500 million in digital revenue by 2015. 

With annual cash flow exceeding $1 billion, Western Union has plenty of capital to support these expansion plans and future dividend growth. Dividend payout is just 19%, which leaves ample room for more double-digit dividend hikes. 

Risks to Consider: Western Union plans to boost market share erosion for its Vigo money-transfer business in Latin America by reducing prices. While lowering prices will likely help the company improve market share, profit margins will also shrink. Western Union plans to maintain high margins through cost-cutting. The company is also stepping up investments in new technologies. These investments should help the company’s competitive positioning in the long-run, but will result in short-term increases in operating costs.

Action to take –> Before the October 2012 selloff, Western Union shares were yielding just 2%. Now is a great time to lock in a fast-rising dividend and 3.6% yield by buying a stock that trades incredibly cheap against its peers. 

P.S. — We call them Retirement Savings Stocks… they can hand you a “second income” as much as 14 times what you can get with CDs, seven times higher than bonds, and as much as three times higher than brand-name Dow stocks. To learn more about them, go here.