United Parcel Service (UPS) Stock Analysis

With the stock market still continuing it’s position at very high points – it has left us dividend value investors to find little-to no room to make a move.  There have been flashes of companies taking a few steps back, such as Target (TGT) and Apple (AAPL), but what other companies are out there that may have not been in the public news, but that still look attractive right now?  Well, I received a package in the mail the other day and had a conversation about what industries may be benefiting from low oil prices?  What about shipping companies?  Better yet… what about United Parcel service (UPS)?  Let’s find out!

UPS

Intro to United Parcel services, Inc. (UPS)

There are 2 major players in the ground shipping, if you exclude the USPS – that is United Parcel Services (UPS) and FedEx (FDX).  Before we get into UPS, we wanted to bring in the background:

From Google Finance, “United Parcel Service, Inc. (UPS) is a package delivery company. The Company is a provider of global supply chain management solutions. It delivers packages each business day in over 220 countries and territories. The Company operates in three segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. The Company offers a spectrum of the United States domestic guaranteed ground and air package transportation services. The Company’s International Package segment includes the small package operations in Europe, Asia, Canada and Latin America, the Indian sub-continent, the Middle East and Africa. UPS offers a selection of guaranteed day and time-definite international shipping services. The Supply Chain & Freight segment consists of the Company’s forwarding and logistics services, truckload freight brokerage, UPS Freight and its financial offerings through UPS Capital. UPS offers a portfolio of guaranteed and non-guaranteed global air freight services.”

Over 200 countries.. wow!  They are all over the place.  I was at an airport and I could see one of their flights coming in to ship products.  Just amazing.  Further, this comes in at a time when it has occurred again – it has been well over the 30 days since I’ve purchased a stockgetting antsy, just one more time but I will be using our great Dividend Diplomat Stock Screener metrics to boot.  Let’s get into the details on UPS, and their competitor FedEx (FDX)!  

UPS Analysis

UPS FDX

1.) Dividend Yield – UPS is definitely in that “happy” range of over 3% currently and definitely takes the pie here, whereas – FDX has a MUCH lower yield at 0.61% – which could put them in discussions with low yield high dividend growth stocks.  I like UPS’s yield here, for sure!

2.) Payout Ratio – Here we go!  This was just analyzed in a recent article by me on why it is such an integral part of your screener during difficult times, given the lower earnings growth or even declining period we are embarking upon.  We love that 40-60% range and BAM! UPS is right in the middle at a perfect 50%, given their forward EPS of $6.24.  Obviously FDX has a high forward EPS figure currently based on estimates and only pays out a small portion of their investment.  FDX’s current EPS, though, is at $4.07, so definitely a HUGE change there.  HOWEVER – both companies have ample room to grow their dividend, I love it.

3.) Dividend Growth Rate – This is a big proponent here, as we know –  I love the impact the dividend growth rate has on a portfolio and it’s very wonderful to see with these 2 stocks.  Now, UPS has increased their dividend for going on 7 years now (as during a few economic difficult times, they maintained, NO CUTS!), and FedEx has gone on for multiple years as well.  What I love is no cuts here.  Further – the 5 year growth rate is solid at 8.81% for UPS and 16% for FedEx.  However, given how low the yield is for FedEx – one would expect a big DGR.  I like the balanced approach of UPS here, for some odd reason.  UPS over the last 3 years (8.26%) is also very similar to the 5 year, therefore, consistency has been fun to see with them.

4.) 5 Year Average Dividend Yield – Both are beating their 5 year average yield – with UPS at 20 bps and FDX at 10 bps.  I like UPS here, given they have a bigger basis point margin to boot.  This is another sign of undervaluation, which we love as dividend investors.

5.) Price to Earnings (P/E) Ratio – This is where it gets interesting.  Based on UPS forward EPS, the P/E ratio is at a 16.42.  Undervalued against the market and I will have to say against the industry, BECAUSE of what I said in #2 point above – FedEx has a very interesting forward P/E.  Analysts were showing between $11.50 to $13.00, therefore I split in the middle essentially.  Both show undervaluation, but such a difference in FDX.  Therefore, I rely more on the UPS data, and their track record of consistency.

Damn.  This is interesting.  UPS is trading at a fairly nice level right here.  You can grab a solid yield at above a 3%, and a solid DGR above 8%.  They have been consistent and are about to pay their next dividend come 6/1.  Therefore, there is plenty of time until the ex-dividend in August for the 3rd quarter payment.  They also raise their dividend during the February time frame, therefore, that ship has sailed already from a dividend increase standpoint.  This stock is very interesting.  Further, the share count are down approximately 1.6% from 3/31/15 to 3/31/16.  Which is intriguing, and they have a nice share buy back policy of, ” In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion, which has no expiration date.”  AKA WOW.  Just buying back shares.  NOT TOO BAD.  I love this…

Conclusion on United Parcel Services, Inc. (UPS)

Well, well, well… I love the share repurchase program, the climbing EPS, the consistency of the dividend and dividend growth – it’s hard not to buy this.  Further, a dead smack in the middle payout ratio and an attractive P/E… DAMN!  It’s hard to beat right now and given the market, this stock hasn’t been beat up too bad and actually has stood tall.  I am DEFINITELY adding it to my watch list for the time being and am very, very excited about seeing if I can make a move on this shipping vehicle.

What do you think of UPS?  Like FedEx better?  Do you think one or both are attractive?  Which one?  Also – is there something I’m not seeing here?  Thank you for coming by and reading everyone, cannot wait to hear your thoughts.  Please comment below and we’ll get some discussions going.  Happy Investing!

-Lanny

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9 thoughts on “United Parcel Service (UPS) Stock Analysis

  1. Back in April I meant to do a “Billionaires Watch List” where I used the portfolios of Bill Gates and Warren Buffett as the starting universe of stocks. I got them all loaded into my watch list google sheet, and even went through to get the latest cash flow data and historical valuations. I stalled out at getting the dividend growth data, though, and then it was May and I just aborted the whole April watch list. It’s still a tab on the published sheet, I just never wrote a post about it. Maybe some other time.

    Anyway, the point is that UPS was one of the 6 (out of 61) stocks held by BOTH the oracle and Mr. Bill. Had I actually overcome the inertia to complete and write up my April watch list…I’m pretty sure UPS would have been on it.

    They generate gobs of free cash flow, don’t have too much debt, and are trading at discounts to their historical 5-year average PE and 5-year average yield.

    Plus, if AMZN is going to take over the world…UPS will play a major role.

    You have to do some serious digging in this market, but gems like this are out there. Nice work!

    • Catfish,

      You definitely have to do some digging in this market times, easily. I somehow fell through to UPS through our screener and was pleasantly surprised to find them on the list. Free cash flow is king and their definitely showing metrics better than their 5 year averages. Not a bad play, eh? The watch list, for sure.

      -Lanny

  2. Lanny,
    Both have been on my watchlist for a while, sitting there quietly. Each looks very attractive for different reasons – UPS with its nice front loaded yield and room for decent growth while FDX looks like it could quadruple its yield easily. You analysis of UPS (and indirectly FDX) shows that they are both attractive long term holders.
    – Gremlin

  3. I have my eyes on UPS. Such a great company with solid competitive advantage. I will have to wait for dips but definitely deserve a spot in my watchlist. Thanks for sharing!

    BSR

    • BSR,

      I do feel like they have great competitive advantages, as well as the “icon” of UPS – very well known and respected. I would love to see them somehow “dip” below $100… that would be the money spot!

      -Lanny

  4. Alright, I’ll assume the contrarian role – but first have to point out you excluded DHL (Deutsche Post AG – DPSGY) yielding about 3.25%. Also to exclude a prime (pun intended) competitor in the USPS is short-sighted (think Amazon Sunday deliveries).

    With fuel prices on the rise (a large expense) year over year comps will be facing headwinds Another large expense, labor, is under pressure. The USPS union contract is in arbitration. UPS contracts expire in 2018. Both face upward pressure from rising minimum wage rates. Historically prices/wages have been offset by productivity gains, generally through technological advances. Not sure this is happening this cycle.

    Then you have potential disruptors such as drones, self driving vehicles and Uber. 🙂

  5. I’d be curious to see what the current Amazon experiments of doing their own deliveries might effect UPS in the long term. If Amazon really does make the move to control their own delivery system, UPS would lose a decent amount of business they currently have. I’m not sure how much the Amazon business makes up of UPS business (I’m sure it probably isn’t that big) but a few changes like that might make the growth slow down a bit due to more competition. Good analysis though!

    • IPD,

      Thank you very much for the post! If Amazon does their own shipping – would be a huge impact to UPS, without a doubt, as a large % of shipping stems from Amazon, hands down. BUT, I think I read that UPS only handles 30% of amazon shipments, supposedly, so not that extreme of an impact, but impact nonetheless. Great add though, loving it.

      -Lanny

  6. Nice analysis Lanny. However, like Thias I’d worry about their main customer (?) starting to deliver themselves. Are they working on automated delivery options? They may fall behind real quick if they aren’t.

    Tristan

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