I have a feeling that some growth-oriented readers out there might groan a little at this stock pick. But in my experience, some of the most successful investments come from “boring” industries that may not be all what they appear.

In today’s fast-paced digital world, the mundane money transfer business seems so last century. Who even carries cash anymore, right?

To some, this service is about as relevant as a telegram.

[ad#Google Adsense 336×280-IA]That argument is largely true here in the United States. But Western Union (NYSE: WU) serves customers in 200 countries — 199 of which are not the United States.

And while cash may no longer be fashionable in New York or Los Angeles, it’s still the preferred means of exchange in cities like Johannesburg, South Africa, and Mumbai, India.

Here’s what is happening.

There is a planet-wide population shift of workers moving from poor countries to wealthier ones in search of higher pay.

Odds are, you have probably crossed paths with one of these transplants.

My wife has one co-worker from Bosnia and another from Nepal. I recently met a young sales person who had traveled all the way from the Solomon Islands. Her entire country has a GDP of $1.1 billion — about what Wal-Mart takes in on an average Tuesday. I didn’t ask, but I would be surprised if her family back home on the island uses Apple Pay.

Most likely, they do business with the local Solomon Islands dollar.

A 100 Solomon Islands Dollar Note
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According to the World Bank, there are more than 200 million of these immigrants from all nationalities. They might work in a Manhattan deli or a London hospital. But they send a portion of their paycheck back home to families in Laos or Bulgaria or somewhere else. Forget about plastic — many consumers in these emerging countries don’t have bank accounts.

That’s where Western Union comes in. The company has a vast network of 500,000 agents that facilitate the transfer of 130 different currencies in 200 countries worldwide. Make no mistake, this is a huge business. About $583 billion in cash was wired across boarders last year. And Western Union is the undisputed leader.

I love scalable businesses with this type of operating leverage. And Western Union is a textbook example. Serving 10 or 20 customers in any individual market would be a losing proposition. But this network transacts far more volume than the breakeven point — over $80 billion a year — with more customers coming in daily.

In 2014, Western Union processed 255 million money transfers. Last year, it handled 262 million transactions. That’s an increase of 7 million.

Now, if McDonald’s sells 7 million extra hamburgers, there is a cost associated with those extra revenues (for meat and other ingredients). But in this case, there is no inventory or raw materials to buy, and the necessary infrastructure is already in place. So while every one of those 7 million extra transfers earned a fee, the cost to process them was minimal. In fact, operating expenses dropped to $4.4 billion from $4.5 billion the year before.

That drove operating margins to 20.9%, allowing the company to pocket more than $1 billion in operating cash flows.

In recent years, management has been returning 93% of its available free cash flow to stockholders. Over the past 12 months, that generosity has taken the form of $317 million in dividend distributions. That amount is headed higher, following a 20% dividend increase in the annual payment last year to $0.62 per share — and then another hike this month to $0.64 per share.

The current dividend yield of 3.4% is about 70% higher than the S&P 500 average of 2.0%.

Western Union is a big proponent of share repurchases as well, investing a net $436 million over the past year. Those buybacks have reduced the share count to 509 million from 527 million.

Looking ahead, management expects to produce modest 3% to 5% revenue growth in 2016 and once again generate over $1 billion in cash profits. And while the proliferation of phones and other Internet-connected devices has brought change, Western Union isn’t being bypassed — quite the opposite, in fact.

The company has invested aggressively to take a leadership in fast-growing electronic channels and earned $300 million in mobile money transfer fees last year — nearly double that of its next closest rival. I expect the company to take further strides in expanding its digital capabilities.

Western Union may be dull, but it’s a wonderful business with high margins, few competitors, and high barriers to entry — not to mention modest reinvestment needs and generous returns of capital to investors.

— Nathan Slaughter

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Source: Street Authority