Western Union's Dividend Now Yields a Whopping 13.5%. Here's Why I'm Buying Its Competitor Instead.

Western Union (NYSE: WU) has been around since 1851, and this may be the lowest point it has ever experienced in its history. Its shares are down 75% from their highs, reaching a 21st-century low as its physical remittance business is rapidly being disrupted by digital peers.

Many investors look at Western Union and its dividend, which now yields 13.5%, as an attractive value stock to bet on. However, the opposite is true. Western Union looks like a prototypical value trap, while its competitor, Remitly Global (NASDAQ: RELY), looks like a great stock to buy for the long haul.

Here's why I'm betting on Remitly Global and avoiding buying Western Union's 13.5% dividend yield.

Image source: Getty Images.

Struggling market transition

Before the internet and digital money, Western Union had built itself a nice business for international money transfers. Through retail partnerships worldwide, the company made it easy for citizens of one country to deposit money at a Western Union branch and have the recipient pick it up anywhere in the world. All with Western Union's cut, of course.

Now, the vast majority of people worldwide would rather send money digitally via smartphones, which is leading to significant declines in physical retail revenue. The company is trying to transition its customer base to its own digital product, which grew revenue by 7% year over year last quarter. However, it hasn't been able to offset the decline in physical retail and comes with much lower profit margins.

Western Union's operating margin was 13% last quarter, down from 19% the year prior. Significant declines in the physical retail business will lead to further margin compression in the years ahead unless it can accelerate market share gains in the digital remittance space. As this margin continues to decline, Western Union will have trouble paying its dividend, which is likely to be cut in the near future.

Remitly's market share gains

Contrast these margin declines with Remitly, a pure-play digital remittance operation that's lapping up Western Union's market share losses while benefiting from its leaner operating model.

Last quarter, Remitly's customer base grew 20% year over year to 10.1 million. Revenue also grew 20% to $495 million, with total send volume across the platform up 27% to $23.5 billion. The company may not be as big as Western Union today, but it's taking market share while the former is losing share, and quickly.

At the same time, Remitly's margins are beginning to expand as it gains operating leverage over its existing remittance rails. Last quarter, it actually had the same operating margin as Western Union, at 13.5%, even though it is still investing heavily in marketing, product development, and opening up new remittance corridors.

As Western Union continues to struggle, Remitly should capitalize on its losses, leading to further market share gains and revenue growth in the coming years.

WU EBIT Margin (Quarterly) data by YCharts

Why Remitly is a better buy

The one reason to buy Western Union stock is its high dividend yield in the double digits. However, with operating income declining 30% year over year last quarter, the company will likely need to cut its dividend quickly and manage the $2.7 billion in debt on its balance sheet. No matter how cheap the stock looks today, earnings declining at this rate will almost certainly lead to trouble.

Contrast this with Remitly, which has a market capitalization of $4.9 billion and expects to generate more than $3 billion in revenue by 2028. If it can keep expanding its profit margins to 20%, this $3 billion in revenue could turn into $600 million in bottom-line earnings, or just a price-to-earnings ratio (P/E) of 8. This makes the stock much cheaper than Western Union if you plan to hold for multiple years, and look beyond timestamp metrics like trailing dividend yield.

Brett Schafer has positions in Remitly Global. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.