After markets closed on Tuesday evening, payment services giant Western Union Co. (WU) reported third-quarter results that met the consensus estimate for revenues and beat the estimate on earnings per share (EPS). But the stock got pounded Wednesday morning, even after adjusting the low-end of its guidance range upward.
The company posted EPS of $0.39, above the consensus estimate of $0.35, but well below last year's EPS of $0.45. Revenues came in at $1.41 billion, against an estimate of $1.4 billion and last year's total of $1.42 billion.
Western Union raised its full-year EPS guidance from a range of $1.33 to $1.43 to a new range of $1.38 to $1.43. The consensus estimate called for EPS of $1.44.
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The problem appears to be the company's expectations for 2014 costs to comply with increased legal and regulatory requirements in countries where it does business. Here is what Western Union had to say about these costs:
While the Company has increased its investments in compliance considerably in recent years, significant additional investment in 2014 is now anticipated in light of the current environment and our internal reviews of the increasingly complex and demanding global regulatory requirements. … Western Union expects its compliance related expenses to increase from approximately 2.5% of revenue in 2013 to a range of approximately 3.5% to 4.5% of revenue in 2014, based on preliminary reviews of the programs. Although the Company is in the early stages of its 2014 budgeting process, it still expects revenue growth in 2014, but no longer expects growth in operating profit due to both these incremental costs as well as potential business impact from new compliance procedures.
Western Union no longer expects any growth in operating profit at all next year? The company has posted operating income of $869 million in the first nine months of 2013, down 17% from its total in the same period a year ago. Compared with the third quarter of 2012, operating profit is down 19%.
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Without growth in operating profit, there will be no EPS growth, and likely no dividend growth. Western Union currently pays an annual dividend of $0.50 for a yield of 2.6%.
Shares were down 11.4% in late morning trading on Wednesday, at $17.03 in a 52-week range of $11.93 to $19.50.