United Parcel Service, Inc.'s (NYSE:UPS) is an Interesting Dividend Prospect at This Price

Published
July 29, 2022
NYSE:UPS
Source: Shutterstock

Key Takeaways:

  • UPS delivered solid Q2 results
  • Institutional opinions are clashing
  • The dividend remains attractive at this valuation

United Parcel Service, Inc. (NYSE: UPS) seems to be giving mixed signals despite the overall positive outlook from the latest earnings report. As delivery volumes shrank, the company increased revenue per piece.

Yet, despite reaching for such short-term fixes, the current P/E ratio mandates a look into an attractive, above-average yielding dividend.

UPS second quarter 2022 results

  • EPS: US$3.26 (up from US$3.06 in 2Q 2021).
  • Revenue: US$24.8b (up 5.7% from 2Q 2021).
  • Net income: US$2.85b (up 6.5% from 2Q 2021).
  • Profit margin: 12% (in line with 2Q 2021).

Revenue was in line with analyst estimates. Earnings per share (EPS) surpassed analyst estimates by 3.4%.

Over the next year, revenue is forecast to grow 3.1%, compared to a 5.1% growth forecast for the industry in the US. Over the last 3 years on average, earnings per share have increased by 38% per year but the company’s share price has only increased by 15% per year, which means it is significantly lagging behind earnings growth.

Prior to earnings, Wolfe Research issued a note downgrading the stock to a Sell-equivalent rating due to earnings and valuation risk. Interestingly, Wolfe upgraded the Trucking sub-sector to Market Weight (from Underweight) and lowered Airfreight & Logistics to Underweight (from Market Weight). Meanwhile, Evercore ISI issued an Outperform rating, arguing that UPS has what it takes to take on the volume headwinds.

Regarding the latest earnings, CFO Brian Newman noted that the revenue per piece increase came from higher fuel costs (400 basis points) and base rates and other costs (790 basis points). Additionally, total expenses that rose by 6.9% were due to fuel and employee wages and benefits.

A Closer Look Into UPS's Dividend

With United Parcel Service yielding 3.2% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be surprising to discover that many investors buy it for dividends. The company also bought back stock during the year, equivalent to approximately 0.9% of the company's market capitalization at the time. There are a few simple ways to reduce the risks of buying United Parcel Service for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

historic-dividend
NYSE: UPS Historic Dividend July 29th, 2022

Payout Ratios

If a company is paying more than it earns, the dividend might have to be cut. Thus, when inspecting dividends, we have to look into earnings.

Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. United Parcel Service paid out 41% of its profit as dividends, over the trailing twelve-month period. A medium payout ratio strikes a good balance between paying dividends and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Additionally, we should inspect whether the company generated enough cash to pay its dividend. United Parcel Service paid out 39% as dividends of the free cash flow generated last year, suggesting the dividend is affordable. It's positive that United Parcel Service's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable. A lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Remember, you can always get a snapshot of United Parcel Service's latest financial position, by checking our visualization of its financial health.

Dividend Volatility and Growth Potential

Looking into the past, we can see that the dividend has been stable over the past 10 years, which is excellent. This could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was US$2.1 in 2012, compared to US$6.1 last year. Dividends per share have grown at approximately 11% per year over this time, which is exceptional.

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing. This is essential to maintaining the dividend's purchasing power over the long term. It's good to see United Parcel Service has been increasing its earnings per share by 25% a year over the past five years. We do have to keep in mind that this is likely an unusual number due to

Conclusion

Although institutions seem to have mixed opinions on UPS, from the dividend perspective, it passes our checklist. Its dividends are stable, payments are affordable, and its growth prospects are present. Finally, at a P/E ratio of 15x, the company trades below the industry average of 17x. Even though we see price increase per piece as an unsustainable short-term fix for energy cost pressures, we have to note that UPS is a company with a rich history that has experience delivering results in a recessionary environment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analyzing a company. Taking the debate a bit further, we've identified 1 warning sign for United Parcel Service that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalization above $1bn and yielding more than 3%.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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