The start to December has provided some rocky moments in the market, to say the least. There was a new stock that popped up on my screener (which will also be on my watch list going forward at these levels). It is the holiday season and I’m sure you have seen their delivery trucks buzzing around the neighborhood. Here is why I have initiated a position in United Parcel Services (UPS).
Who Is United Parcel Services?
This may seem like an obvious statement, but UPS is a pretty large company in the package delivery and logistics industry. The company has over $52b in revenue through the first 9 months of 2018 and earned over $66b for the twelve months ended 2017. The company’s revenue is easily on pace to surpass their 2017 clip. In the company’s last earnings release, they reported that EPS is up 20%, revenue is up 8%, and the company raised their free cash flow guidance to over $5b during the year. The release shows that the company continues to crush it during the year. The company has two major operating segments: package delivery and logistics. Based on 2017 figures, package delivery accounted for ~81.5% of the company’s revenues and logistics accounting for the other 18.5%.
The company competes against Fedex and I wanted to quickly understands what makes the two companies different. Investopedia produced a great article in October 2018 and wrote about the differences in business models between the two companies. There was one line that stood out in the article: “When it comes to business models, the two companies have each found their different business niches, with UPS focusing on small package delivery and FedEx specializing in time-sensitive express service.” In the current shopping environment, where e-commerce’s is taking over, specializing in small package delivery should allow UPS to continue being relevant and capitalize on this new trend. Even if Amazon launches Amazon Air (But there are so many details to emerge about the launch of Amazon Air, so I don’t want to speculate about that or will I let it impact my investment decision at this moment).
Dividend Diplomats Stock Screener
It is now time to run UPS through the infamous Dividend Diplomats’ Stock Screener. This is our simple stock screener that we are always using to identify potentially undervalued dividend growth stocks. Occasionally, we will throw in some additional metrics as well (if deemed necessary). For the purposes of our stock screener, I’ll use my last purchase price of $105/share, forward EPS of $7.83/share, and an annual dividend of $3.64/share.
Metric #1: Price to Earnings Ratio below Market – 13.4X – The S&P 500 trades at a forward multiple between 17X-18X, so UPS passes this metric as they are clearly trading below the broader market.
Metric #2: Dividend Payout Ratio below 60% – We use a 60% threshold for our stock screener as we believe this is the mark this is a healthy mark that allows the company to continue growing their dividend going forward without sacrificing the safety of the dividend. The payout ratio is one of our favorite metrics to follow and it is critical for dividend growth investing. So this metric always carries a lot of weight in my analyses. UPS’s dividend payout ratio is 46% at the current levels. UPS passes this metric and still has plenty of room to grow their dividend, if they please.
Metric #3: History of Increasing Dividends – UPS has been paying a dividend since 1999. The company has increased their annual every year but one (2009). UPS did not cut their dividend during this time, just maintained their dividend for a period of time. While UPS is not a Dividend Aristocrat, they have now increased their dividend for 9 consecutive years. The company’s 5-year average dividend growth rate is pretty solid too (7.98%) for a company yielding over 3%.
The purchase & summary
Once UPS passed the metrics on our screener, I was pretty excited to strike and initiate a position. I actually purchased 5 shares of UPS twice, once at $106.61/share and once again when the price fell to $105.00/share. In total, I purchased 10 shares of UPS and added $36.40 in forward dividend income to my portfolio. UPS represents a new industry as well in my portfolio, so I am pretty excited to continue diversifying the holdings in my traditional portfolio. Luckily, since I have free trades for a few more months, I will continue to add to my position if the price falls and lower my cost basis. But as the last two months have shown, anything can happen in this current market environment and new deals may present themselves out of nowhere. Heck, that’s part of the reason I am now a UPS shareholder! Let’s just keep finding great undervalued dividend stocks to purchase (here were my November purchases) and continue to add to our dividend snowball.
What are your thoughts about UPS? Do you prefer owning UPS or Fedex? Or are you looking at buying a high-yielding oil company or consumer staple that is on sale at the moment?
-Bert