UPS – Good yield to wait for growth

United Parcel Services is the world’s largest package delivery and logistics company. It is also a premier provider of global supply chain management solutions. UPS connects more than 220 nations and territories across roads, rails, air, and ocean.

The company’s three segments are U.S. Domestic Package (63% of 2019 revenue), International Package (19%), and Supply Chain & Freight (18%). It operates through more than 1,800 operating facilities.

The US is its largest market accounting for 79% of sales while Europe is the largest among international markets (21%). The company has an extensive global logistics and distribution system consisting of 2,500 worldwide operating facilities and 125,000 vehicles. UPS is also developing Smart Global Logistics Network, utilizing technological advances in artificial intelligence, robotics, etc.

Investment Data

Revenue Growth & Market Exposure

Founded in 1907, the company has carved a strong position in the industry with its reliable services, a broad portfolio of logistics capabilities, and industry-leading technologies and solutions. Starting out as a tiny messenger service, today UPS has evolved into a multi-billion-dollar global corporation offering a broad array of services in the package and freight delivery industry. The company caters to 11.5 million pick-up and delivery customers and delivers close to 5.5 million packages every year. It is also a leading provider of less-than-truckload and truckload services coast-to-coast with over 5,800 vehicles and 23,000 trailers.

UPS was considered as a critical infrastructure service provider responsible for keeping critical healthcare and other supply chains operational. The company played a major role in providing logistics and transportation of advanced-technology ventilators and other life-saving cargo in the current crisis situation. It also partnered with leading industry names like GM and Ventec Life Systems in this regard. UPS’s digital access program helped to sustain small and medium businesses as well. The company continues to add capacity to keep critical supply chains and commerce moving.

UPS witnessed a surge in e-commerce and healthcare volumes driven by a dramatic shift in consumer shopping behavior and medical needs. The company is focusing on automation, increased network flexibility, and new technology-enabled solutions for its customers, as a result. UPS’s international package segment, as well as business-to-business volumes, suffered a setback due to reduced trade and commerce in the wake of the coronavirus outbreak. There was a drag of ~$140 million on 1Q2020 as an impact of COVID-19. UPS also withdrew its previously issued 2020 revenue and diluted EPS growth guidance. 

Dividends

UPS has been paying growing cash dividends for the last 50 years and has increased its dividend by four times since its IPO. It has raised dividends by more than 500% in the last two decades and has never cut them in the past. The company’s recent payout represented a 5%+ increase over the prior year and it also has a strong dividend yield of 3.7%. UPS’s dividend payout ratio is high near 80% but the company has maintained a dividend growth rate of over 7% CAGR over the last decade.

UPS is a Dividend Achiever. It has maintained an EPS growth rate of over 9% CAGR in the last decade. The company generated $2.6 billion in cash from operations and $1.6 billion in free cash flow in the latest quarter. However, it suspended share buybacks and reduced its CapEx in the wake of the current pandemic situation reducing nearly $1.8 billion in cash outflows in 2020. The company, also has a high debt load taken to expand its e-commerce and healthcare businesses.

UPS is deploying technology to expand and strengthen its integrated network and its enterprise-wide transformation. It continues to make investments that help customers to better connect with the company and enjoy more control over their shipments. UPS is known for its speed and safe and reliable deliveries. The company is targeting a 30%-35% increase in efficiency on the back of its transformation initiatives and increasing automated facilities.

Competition

UPS competes with many local, regional, national, and international logistics providers. It competes with postal services in the U.S. and other nations, various motor carriers, express companies, freight forwarders, air couriers, large transportation, and e-commerce companies. In addition, the supply chain and freight segment are highly susceptible to macroeconomic conditions. FedEx which is a premier global transport and logistics company, is UPS’s primary rival with operations in 220 countries and territories worldwide. However, UPS’s integrated global air and ground network is the most extensive in the industry. 

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:UPSUPSUnited Parcel Service Inc.IndustrialsIntegrated Freight & Logistics0.61118.3583.3323.9724.814.940.03413.410.817844.040.105887Consumable - DiscretionaryNONONONOUSA1
NYSE:FDXFDXFedEx CorporationIndustrialsIntegrated Freight & Logistics0.65165.0443.2333.6824.814.900.01581.580.530642.600.2102105Consumable - DiscretionaryYESYESNONOUSA1
NASDAQ:EXPDEXPDExpeditors International of Washington Inc.IndustrialsIntegrated Freight & Logistics0.6080.1913.3524.2524.813.310.01301.300.314221.040.090286Consumable - DiscretionaryYESYESYESNOUSA1
NASDAQ:CHRWCHRWCH Robinson Worldwide Inc.IndustrialsIntegrated Freight & Logistics0.5886.0711.5923.9424.813.600.02372.370.566742.040.073076Consumable - DiscretionaryNOYESNONOUSA1

Bottom Line

Growing demand for healthcare products and increasing global online shopping trends act as strong tailwinds for UPS. The company’s continuous investments in new capabilities should strengthen its position as a leading package delivery company. It is highly unlikely that the company would cut its dividend as it has said that its dividend “remains a high priority and is a hallmark of our financial strength.” UPS should, therefore, continue to grow its dividend comfortably in the low double-single range over the coming years.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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