UPS Stock Analysis
I made my first investment in United Parcel Service (also known as UPS) in 2014 because of the growing UPS stock dividend.
I also wanted to participate in the increased demand for package delivery. Since much of the world’s population buys products online now. And then they have those products delivered to their door by UPS. Or, one of UPS’s competitors.
And remember the old UPS advertising slogan? I liked it and remember it as “What can brown do for you?” Brown refers to their signature brown color on all those delivery trucks buzzing around your neighbor.
Most noteworthy, I suspect that recent global events will increase the trend toward home delivery. But this growing business opportunity is not without its challenges.
So let’s analyze the stock of this delivery and logistics operation. To do so, I will work through a UPS stock analysis. I want to address some important questions.
First of all, is UPS a good dividend stock? Furthermore, is UPS a good stock to buy? Finally, what might the future hold for the UPS stock dividend?
Disclosure: This post contains referral links.
UPS: COMPANY BACKGROUND
UPS is the world’s largest package delivery company. They are a leader in the U.S. less-than-truckload freight delivery segment also known as “LTL” for short. And UPS is a premier provider of global supply chain management solutions.
UPS uses more than 500 planes and 100,000 vehicles to deliver millions of packages per day to residences and businesses around the world. Clearly, UPS has a capital intensive business that also consumes large amounts from gas and utility companies.
Revenues flow from these 3 primary 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 and barriers to entry for smaller players. Characteristics like this are sometimes referred to as an economic moat. 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’ 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 what they call their transformation plan. It includes 4 strategic imperatives that are expected to drive growth.
International high-growth markets
With a small portion of total revenue coming from international markets, UPS recognizes this as a growth opportunity. Opportunities include growth in Europe, Asia, and emerging markets. And growth in freight transportation as well as contract 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 believes 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”.
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.
WHAT IS THE UPS STOCK DIVIDEND AND DIVIDEND YIELD?
The dividend on UPS stock is $4.04 per share on an annual basis. Given the recent UPS stock price, that dividend per share puts the UPS dividend yield at 2.5%.
I like the size of the UPS dividend yield. It is near in my dividend yield sweet spot between 3 and 5%.
That is not to say I won’t buy a stock with a dividend yield that falls out of this range. But that is a story for another day.
How Often Does UPS Pay Dividends?
UPS pays dividends every 3 months or 4 times per year.
In What Months Does UPS Pay Dividends?
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.
What 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 by the ex-dividend date. The UPS ex-dividend date is around the 20th day of each month in which it pays its dividend.
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 growth looks like next.
UPS STOCK DIVIDEND HISTORY AND DIVIDEND GROWTH
|1 Year||3 Years||5 Years||7 Years|
Dividend growth has been substantial and consistent over the past 7 years. In addition, UPS increased the dividend by another 5.2% for 2020.
In the press release announcing the 2019 and 2020 dividend increases, 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.
Consecutive Years of UPS Dividend Increases
Looking at the UPS dividend history would not be complete without mentioning the number of consecutive annual dividend increases. So, I would like to add that the UPS dividend has been increased annually for the past 11 years.
The annual increase streak could be much longer. But, the company paused dividend growth in 2010 as it navigated the depths of the recession during that time.
UPS REVENUE TREND
Revenue growth has been steady. It has compounded 5% annually over the past 7 years. Revenues are directly impacted by
- Global economic growth
- Growth in e-commerce
- The company’s strategic transformation initiatives
UPS STOCK DIVIDEND AND EARNINGS PER SHARE
The historical earnings trend is generally favorable. However, UPS accounting earnings are volatile due to accounting for pension expenses related to UPS’ 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%.
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, dividends are paid from cash, not accounting earnings.
UPS Dividend Payout Ratio Based On Cash Flow
The table below shows that UPS has paid out all of its free cash flow over the past 5 years in the form of dividends.
Table 1: UPS Dividend Payout Ratio (based on cash)
|Fiscal Year||Dividends Paid*||Free Cash Flow*||Dividend Payout %|
This is not the best of situations. 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 $9.2 billion of shares in the last 5 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 8.5 times.
I would like to see the debt reduced. But, the need for debt reduction limits my expectations for dividend growth in the next few years.
Simply Investing Report
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”.
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 lowered their ratings since the last time I published a UPS stock analysis.
UPS STOCK DIVIDEND GROWTH AND SAFETY
Here’s my assessment of UPS dividend safety. And, UPS dividend growth potential. I use the information we have reviewed thus far to make these judgments.
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 high dividend payout ratios
So, I’m going to project 4-5% dividend growth in the coming years.
UPS STOCK VALUATION
From my perspective, I believe UPS stock is currently trading at a high valuation.
Let’s look at value more closely. And, judge UPS stock value in several ways:
- Dividend Discount Model
- Price to earnings ratio
- Morningstar fair value estimate
Dividend Discount Model
The single-stage dividend discount model considers several factors I have discussed thus far.
- Current dividend payment – $4.04 per share
- Projected dividend growth – 5%
- My desired annual return on investment – 9%
Using these assumptions, the UPS dividend discount model calculates the fair value of UPS stock to be $106 per share.
Dividend models have some limitations. So, let’s look at other indicators of value.
Morningstar Fair Value for UPS Stock
The investment analysis firm Morningstar believes UPS stock is fairly valued at $123 per share.
UPS Stock Price to Earnings Ratio
The UPS stock price earnings ratio sits at about 30 times.
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. At the time, I believed UPS stock represented a solid value at the depths of the recent bear market.
I plan to hold my current shares of UPS stock. But, I’m not interested in adding to those shares at this time. Why? Mainly because of the UPS dividend metrics.
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 will likely 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 long-term total return potential of 8-10%
However, when making my personal buy, sell, or hold decisions, I focus more closely on a company’s dividend profile and dividend metrics.
And always remember to keep your investment costs low. I trade stocks for free using the super powerful Webull app.
Or, read my complete Webull stock trading app review.
Further Reading About Dividends And Dividend Stocks Like UPS
- Emerson dividend stock analysis – A Dividend King
- Another industrial sector dividend king: Genuine Parts
- Rev up your dividends with this top-notch engine maker
- Don’t forget about food and beverage stocks for dividends
You May Like These Dividend Investing Book Reviews
Finally, My Favorite Dividend Stock Investing Resources
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