UPS Stock Analysis & Dividend Review

E-Commerce Business Provides Higher UPS Dividend Growth Potential

I made my first investment in United Parcel Service (UPS) in 2014 because of the growing UPS stock dividend. And also wanted to participate in the increased demand for package delivery.

Recent global events have increased the trend toward home delivery. But this growing business opportunity is not without its challenges.

So let’s analyze UPS stock. And address some important questions on the minds of investors.

The UPS stock dividend is supported by e-commerce delivery revenues

First of all, is UPS a good dividend stock? Furthermore, is UPS a good stock to buy? Finally, what does the future hold for the UPS stock dividend?

We will get to these questions and more. But let’s start with some background on the company.

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

UPS: COMPANY BACKGROUND

First of all, UPS is the world’s largest package delivery company.

Furthermore, they are a leader in the U.S. less-than-truckload freight delivery segment also known as “LTL”. 

Finally, UPS is a premier provider of global supply chain management solutions.

UPS uses hundreds of planes and thousands of vehicles to deliver millions of packages per day. To both residences and businesses around the world.

The company has a capital intensive business. That also consumes large amounts from gas and utility companies.

Revenues come from 3 main areas:

  • US package operations
  • International package operations
  • LTL, freight forwarding, logistics services, and retail stores

Their global delivery network, size, and efficiency create large competitive advantages. Also, barriers to entry for smaller players.

Characteristics like this are sometimes referred to as an economic moat. Furthermore, evaluating a company’s economic moat is an important part of stock analysis.

What is an Economic Moat?

The term economic moat was popularized by Warren Buffett.  It refers to a business’s ability to maintain advantages over its competitors. Source:  Investopedia

The moat protects the company’s long-term profits and market share from other firms.  Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.

I don’t know about you, but I like to have dividends from my dividend stocks protected. By as big a moat as possible!

UPS BUSINESS STRATEGY

The company’s business strategy revolves around a transformation plan.  It includes goals in 4 areas that are expected to drive growth.

International high-growth markets

With a small portion of total revenue coming from international markets, UPS sees this as a growth opportunity.  Opportunities include growth in Europe, Asia, and emerging markets.  Also growth in logistics services.

Global B2B and B2C e-commerce

UPS feels there are large possibilities in B2B for small and mid-sized businesses.  And for offering retailers control and convenience in reaching their customers through better technology and logistics.

Health Care & Life Science Logistics

Health care spending accounts for a large piece of the US economy.  By providing visibility, control, and reliability for quality assurance. And deliveries compliant with government regulations. UPS thinks they can further tap this lucrative market.

Small and mid-sized business (SMB) services

SMB accounts for more than 50% of the US small package delivery market.  To serve this market, UPS recruits warehouses in strategic locations to create a network of fulfillment partners for small and midsized businesses.

UPS STOCK SYMBOL

Finally, UPS stock trades on the New York Stock Exchange under the symbol UPS (NYSE: UPS).

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Now that we have covered the key aspects of the UPS business, let’s move forward and check out the UPS stock dividend.

Does the UPS dividend fit within a solid dividend investing strategy? Let’s find out.

HOW MUCH IS THE UPS STOCK DIVIDEND?

The dividend on UPS stock is $4.08 per share on an annual forward basis. When trying to understand dividends and dividend stocks. You may ask, what does the “annual forward dividend” mean?

The annual forward dividend is the most recent dividend per share paid by the company. Multiplied by the number of times each year a dividend is paid.

WHAT IS THE UPS STOCK DIVIDEND YIELD?

Based on the recent UPS stock price, their dividend per share puts the UPS dividend yield at 2.5%.

I like the size of the UPS dividend yield.  It is near my desired dividend yield target between 3 and 5%.

That is not to say I won’t buy or hold a stock with a dividend yield that falls out of this range.  UPS is an example in this case.

HOW OFTEN DOES UPS PAY DIVIDENDS?

UPS pays dividends every 3 months or 4 times per year.

IN WHAT MONTHS ARE UPS DIVIDENDS PAID?

UPS pays dividends in the following months each year: March, June, July, and December. This is a typical dividend payment pattern for many US-based stocks.

WHEN IS THE EX-DIVIDEND DATE FOR UPS STOCK?

For an investor to receive the next UPS dividend payment, they need to complete their purchase of UPS stock before the ex-dividend date. The UPS ex-dividend date is around the 20th day of the month prior to the month in which its dividends are paid.

Most importantly, the UPS ex-dividend date is slightly different each time UPS pays a dividend. That is why I say “around the 20th day”.

To find out the exact ex-dividend dates, check out the dividend history and related information at UPS investor relations.

Let’s see what UPS stock dividend history tells us.

UPS DIVIDEND HISTORY

The company has a nice history of consecutive annual dividend increases. As the UPS dividend has been increased annually every year starting in 2010.

The annual increase streak could be much longer. But, the company paused dividend growth in 2009. They did so to navigate the depths of the recession during that time.

In recent years press releases communicating quarterly dividend payments, management states:

“UPS has a long commitment to cash dividends.  For nearly 50 years, the company has either increased or maintained its dividend. Since 2000, UPS’s dividend has more than quadrupled.”

I like when a company makes a point of touting their dividend history.  It tells me that paying consistent and increasing dividends is part of their culture of rewarding investors.

Speaking of dividend growth…

UPS STOCK DIVIDEND GROWTH

As shown in table 1, dividend growth has been solid and consistent over the past 7 years.

Table 1: UPS Compound Annual Dividend Growth

1 Year3 Years5 Years7 Years
5.2%6.8%6.7%7.2%

And, with their e-commerce business doing so well. Investors may benefit and earn higher dividend payments in future years.

I noted that management made this statement: “dividends expected to grow, subject to Board approval”. As part of this year’s capital allocation plans.

Last UPS Dividend Increase

The most recent UPS dividend increase was very small. Just 1%. I was disappointed in the size of this increase.

But not a complete surprise. Given UPS’s debt levels. More on that in a moment.

Next, let’s move onto some of the business fundamentals…

UPS REVENUE TREND

Revenue growth has been steady.  It has compounded over 6% annually during the past 7 years.

Chart 1: UPS 7-Year Revenue Trend

UPS stock analysis

Revenues are directly impacted by

  • Global economic growth
  • Growth in e-commerce
  • The company’s strategic transformation initiatives

UPS STOCK DIVIDEND PAYOUT RATIO

As shown in chart 2, the historical earnings trend is generally favorable.

Chart 2: UPS Dividends & Earnings Per Share

UPS dividend payout ratio
Adjusted for 2020 pension related charges

However, UPS accounting earnings are volatile due to the complex accounting for pension expenses. They are related to UPS’s largely unionized workforce.

UPS Dividend Payout Ratio Based On Earnings

The UPS dividend payout ratio based on accounting earnings has been rising in the last couple of years. For 2019, it came in at 75%. Then dropped in 2020 after stripping out the pension costs.

The UPS dividend payout rate is getting a little high for an industrial company that is heavily impacted by the worldwide economy.

So, let’s check the UPS dividend against free cash flow. After all, your dividends are paid in cash, not accounting earnings.

UPS Dividend Payout Ratio Based On Cash Flow

The chart below shows that UPS has paid out about 70% of its free cash flow over the past 3 years in the form of dividends.

Chart 3: UPS Dividends & Cash Flow

UPS dividend stock analysis

I would prefer to see a lower dividend payout ratio.

Thie high UPS dividend payout ratio has required them to take on debt to buy back shares of their stock. They have repurchased nearly $10 billion of shares in recent years. Given the current economic uncertainty, it’s not surprising that the company has suspended share repurchases for the time being.

So, this begs the next question. What does the balance sheet look like? I do not like to see my dividend-paying companies loaded up with debt.

UPS BALANCE SHEET

The company uses a large amount of financial leverage.  Also known as debt. And that financial leverage has increased during recent years. 

As I just mentioned, the main reason for higher debt is the generosity that UPS has shown investors.  For most of the past several years, UPS has paid more in dividends and for share repurchases than it has generated in free cash flow.

In order to make the cash payments for dividends and share buybacks, UPS has taken on more debt.  They finance nearly 100% of assets with debt and other liabilities.  And their debt to equity ratio checks in at a very high level.

I would like to see the debt reduced.  But, the need for debt reduction tempers my expectations for dividend growth in the next few years.

Simply Investing Report

The Simply Investing Report
Click to learn more direct from Simply Investing

I would like to check my UPS stock analysis against the Simply Investing report. Simply Investing provides high-quality dividend stock research. And dividend stock recommendations.

Unfortunately, the Simply Investing report does not cover UPS stock. Why not? Because of UPS’s high debt.

Simply Investing typically avoids companies with high long-term debt to equity ratios. The advisory service sticks to very high-quality dividend stocks. This is a good strategy especially when the economy hits difficult times.

You can read my complete review about the Simply Investing report here: Simply Investing report review.

Let’s get another opinion. What do the credit rating agencies think about UPS’s financial position?

UPS CREDIT RATING

UPS has an A2 and A- credit rating from Moody’s and S&P, respectively.  These ratings represent “investment grade-low credit risk”.

Credit rating evaluation grid for each major rating agency

The ratings are an adequate sign of financial stability and the company’s ability to pay its obligations as they come due.

I like a dividend growth stock to have an investment-grade credit rating. But I did note that both of the credit rating agencies reduced their ratings during the past few years.

Finally, if you need to check your very own credit score. You can do so for free using Credit Karma.

Based on everything we have discussed thus far. I now can make an evaluation of dividend safety. And future UPS dividend growth potential.

These metrics are important. When our goal is to find solid dividend-paying companies.

These topics are next…

UPS DIVIDEND SAFETY

I believe the dividend is safe from a reduction in the foreseeable future. 

However, I do have some concerns about the company’s financial position as indicated in their balance sheet. Also, the company has high dividend payout ratios.

These factors limit my UPS dividend growth forecast. And suggest UPS should be held as part of a diversified investment portfolio.

UPS DIVIDEND GROWTH FORECAST

Long term, I expect the UPS dividend to grow at a rate less than earnings growth.

I believe this because of

  • the economically sensitive nature of UPS’s business
  • their need to pay down debt
  • and “highish” dividend payout ratios

On the flip side, UPS has the increasing trend of home delivery on their side. And the additional profits that this business generates.

So, I’m going to project for my dividend income planning purposes 5-7% dividend growth in the coming years. Some years will be better. And some less. But I think 5-7% long-term dividend growth is a reasonable expectation for this company.

Last but not least before we wrap up, stock valuation.

UPS STOCK VALUATION

From my perspective, I believe UPS stock is currently trading at a high valuation. It is fully valued at a minimum.

Let’s look at the value more closely. And, judge UPS stock in a couple of ways:

  • Dividend Discount Model
  • Morningstar fair value estimate
  • Personal Finance buy target price

Dividend Discount Model

The single-stage dividend discount model considers several factors I have discussed thus far.

  • Current dividend payment
  • Projected dividend growth
  • My desired annual return on investment – 9%

Using these assumptions, the UPS dividend discount model calculates the fair value of UPS stock to be $143 per share.

Dividend models have some limitations. So, let’s look at another indicator of value.

Morningstar Fair Value for UPS Stock

The investment analysis firm Morningstar believes UPS stock is fairly valued at $131 per share.

Personal Finance Investment Newsletter

The long-time investment newsletter Personal Finance covers the stock. They have a buy target below $175 per share.

WRAP UP: UPS STOCK ANALYSIS AND DIVIDEND REVIEW

UPS stock holds a small position in my portfolio of dividend stock investments.  I last added to that position in March 2020 at $83 dollars per share.

Currently, I hold UPS in my IRA. If you have been meaning to open an IRA, M1 Finance is an excellent option.

I plan to hold my current shares of UPS stock. But, I’m not interested in adding to those shares at this time. Why? Partly because of the UPS dividend metrics. And also because of valuation.

To explain, let’s circle back to a couple of the questions I posed at the beginning of this article.

Is UPS A Good Dividend Stock?

Here are some thoughts that make me ponder if UPS is one of the best dividend stocks to buy and hold in my portfolio.

  • UPS stock has an attractive current dividend yield
  • The UPS dividend appears reasonably safe but has some risk factors
  • Dividend risk is due to debt and cash flow levels relative to the size of dividend payments
  • These risks could limit future dividend growth

Is UPS A Good Stock To Buy?

The answer to this question always depends on one’s investment objectives and risk tolerance. But here are some reasons why UPS may be a good stock to buy.

  • Has a large economic moat
  • Will benefit from growing e-commerce demand
  • The stock provides diversification from other more typical dividend-paying stock sectors
  • UPS stock has good long-term total return prospects

However, when making my personal buy, sell, or hold decisions, I focus more closely on a company’s dividend profile and dividend metrics.

So, for my portfolio. I have a solid hold call on UPS stock.

Further Reading About Dividends And Dividend Stocks Like UPS

My Favorite Dividend Investing & Finance Resources

I referenced several of my favorite finance tools throughout the article. And have summarized them here for your convenience.

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

I currently own UPS stock and collect the UPS stock dividend!