UPS (NYSE:UPS) Pays a Generous Dividend which is well Covered by Cash Flows

By
Richard Bowman
Published
April 28, 2022
NYSE:UPS
Source: Shutterstock

United Parcel Service, Inc. ( NYSE:UPS ) released first-quarter financial results on Tuesday. The results were a lot better than the market was expecting, but the share price fell after the earnings call . During the call, company executives said they expected US package volumes to decline during the current quarter before improving in the next quarter.

Key takeaways from this analysis:

  • UPS has demonstrated that it has pricing power. 
  • The dividend is well covered by cash flows.
  • Valuation reflects lower than average growth forecasts.

First-quarter highlights:

  • EPS: $3.05 vs $2.88 consensus estimates and 10% higher than a year earlier.
  • Revenue $24.4 bln vs $23.8 bln consensus estimates and 6.5% higher than a year ago.
  • Package volumes were lower across the board.
  • The operating margin improved from 12.07% to 13.34% 
  • Achieved sales and margin targets a year ahead of its 2023 goal.
  • Full-year guidance: earnings of $14 billion on revenue of $102 billion. 
  • Share buyback increased to $2 billion for 2022. 

One of the notable points from these results was the fact that UPS managed to increase revenue despite lower volumes. This means the company has managed to raise prices, which is important given the current inflationary environment. A key input cost for businesses in the logistics industry is fuel, and the ability to pass fuel price increases on to customers is essential for UPS to maintain its margins

Attractive Dividend

UPS has a dividend yield of around 3.3%, which is generous compared to the rest of the US equity market. When investing in stocks for their dividend, it’s important to ensure that the dividend yield is sustainable. In other words: will the company be able to continue paying the dividend given its likely future cash flows?

NYSE:UPS Dividend Yield vs Market 2022
NYSE:UPS Dividend Yield vs Market 2022

The current payout ratio , (the percentage of earnings paid out as dividends) is 37%. Meanwhile, the cash payout ratio (the percentage of free cash flows paid out as dividends) is 48%. These are fairly conservative percentages if we assume that cash flows are likely to remain stable.

In addition to the dividend, the $2 billion share buyback effectively increases the yield the company delivers to shareholders.

Priced for low growth

Logistics Industry P/E Ratio and EPS Growth
Logistics Industry P/E Ratio and EPS Growth

Ecommerce is a growing industry and should provide strong tailwinds over the long term for companies like UPS. However, the industry is currently normalizing after growth accelerated during the Covid pandemic. Analysts are expecting UPS to generate earnings growth of 2.9% over the next few years, which is low but improving — ahead of these results the expectation was for EPS to fall over the next year or two.

The current P/E (price to earnings) ratio is 15.1x, which is slightly lower than the market and low relative to its historical average. If earnings growth estimates continue to improve, it's reasonable to assume the P/E ratio would rise too — though it could obviously fall if the outlook deteriorates as well.

What does this Mean for Investors?

UPS delivered strong earnings growth during the Covid-19 pandemic which set a high bar for the company to beat going forward. At the same time, the company is now facing an e-commerce slowdown and inflationary pressure, and the stock price is tracking the broader market lower. 

On the positive side, the company appears to have pricing power which means its earnings are less vulnerable to rising fuel prices. UPS also offers an attractive dividend yield of 3.3% which is well covered by cash flows. If you believe that e-commerce growth will resume and that UPS can capitalize on that growth, the current weakness may be an opportunity. 

For more detail on UPS, have a look at our full analysis . Alternatively, you can have a look at this list to compare the dividend yields and growth rates of other companies in the transportation industry.

Simply Wall St analyst Richard Bowman 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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