Why UPS is a Dividend Investor’s Dream
United Parcel Service (UPS 0.77%) operates a global network of transportation services for businesses and consumers.
Although you are probably familiar with UPS to some extent, you may not be familiar with UPS as a stock. Here’s why UPS is a dividend investor’s dream.
Strong (if not constant) dividend growth
In 2000, UPS paid a quarterly dividend of $0.17 per share, or $0.68 per share per year. In 2019, UPS paid $0.96 per share per quarter, or $3.84 per share for the year, which represents a dividend increase of more than 500% in 20 years.
During this period, UPS has never reduced its dividend, and there have only been two years that it has not increased it. Add it all up and you have $40.60 worth of low tax rate dividend payments per share during this period, and that does not even include the appreciation of the company’s share price.
UPS is yielding 3.6% at the time of this writing, nearly double the average return in the S&P500 index.
A few headwinds to consider
UPS’s dividend continues to grow and shows a strong yield, but the company is not without risks. For starters, UPS’s debt-to-equity and debt-to-equity ratios — two key financial metrics — have increased as the company continues to take on debt to grow its e-commerce and healthcare businesses.
The downside of UPS using a significant portion of its free cash flow to pay out dividends is that it leaves the company with less retained earnings, which means it continually finds itself get into debt in order to develop its business. However, not all debt is bad. If you believe UPS is using debt to develop its growth potential so that its services and fleet can meet the needs of businesses and consumers who increasingly depend on shipping, then the investment is probably warranted. . However, ensuring that UPS debt does not spiral out of control from overinvestment is something to watch out for.
Unfortunately, the COVID-19 pandemic has resulted in lower business-to-business (B2B) volume, but increased business-to-consumer (B2C) volume as business slows, but more time at home has resulted in increased business-to-consumer (B2C) volume. volume of consumption. While that might seem like a fair trade-off, it’s not. B2C growth can mean higher revenue, but it can also reduce margins due to higher delivery costs.
Due to uncertainty, UPS suspended its stock buyback program, reduced 2020 capital expenditures of $1 billion and withdrew its forecast for 2020.
Some tailwinds too
The good news is that the economy has recovered faster than expected, as people are returning to work, businesses large and small are reopening, and life is getting somewhat back to normal. UPS rated that as China began to recover in March, “outbound business in Asia accelerated both airfreight and small parcels, including the healthcare, high-tech and e-commerce sectors.” Hopefully a recovery in Europe and the US would follow a similar trajectory.
Meanwhile, UPS’s investment in healthcare appears to have paid off as UPS Premier, the company’s essential healthcare shipping service, has responded to the needs of the healthcare industry by response to the pandemic. In this way, UPS is on the front line to help medical professionals with urgent shipments.
A stock of quality income
Like other industry stocks, UPS’s business tends to fluctuate with the broader economy, so there is an inherent risk that if the economy slows, so will UPS. That being said, the company’s investments in e-commerce and healthcare have already given the company a distinct advantage on its competitors.
UPS is not immune to risk, but the company has proven to be a leader in the transportation business. Add in a high-quality, high-yield dividend that should continue to grow, and you have a well-rounded business with the potential to reward investors for the coming years.