UPS - An Old 'Dog' That Can Still Jump

| About: United Parcel (UPS)

High quality, earnings growth and dividends can't compensate for a long-term negative total return. That's a formula for otherwise good companies to get labeled as 'doggy' stocks.

After seeing good potential in FedEx (NYSE:FDX) I began to research United Parcel Service (NYSE:UPS), their main rival.

Something striking jumped out at me when I looked at the data. UPS has gone nowhere over the past nine years. It trades for a much lower price now than it did at its $89.10 peak in December of 2004. Back then EPS were $2.85 versus today's $4.47 (actual trailing 12-months). The dividend was $1.12 annually in 2004. It has more than doubled since to $2.28.

If you held UPS continuously from 2004's high point you received $13.72 per share in cumulative dividends. After almost eight years, UPS shareholders are still $2.27 per share underwater on a total return basis.

The two-year chart shown below tells essentially the same tale. Friday afternoon's price was close to the level UPS saw about 24 months ago (note the red double-headed arrow). By year-end 2012, EPS are expected to have risen by 28.7% over that 24-month span.

How could shares of this iconic company go nowhere for long periods of time while their fundamentals continued to improve? They started out at too high a valuation. Those who paid the top price in 2004 agreed to pay a 31.3x multiple while accepting a meager 1.26% yield.

Paying too much when you purchase stocks, real estate, antiques or anything else usually condemns you to poor results when you're ready to sell. Money is made when you buy wisely- not when you cash out. You simply can't prove it until the transaction is over.

UPS has provided some decent trading opportunities even though it's been a dud for long-term buy-and-holders. The 2008-09 lows gave traders a chance at 100% plus dividends. The summers of both 2010 and 2011 took UPS down to attractive P/Es and yields above 3.3%.

Somewhat surprisingly, today's quote represents the second lowest P/E of the past two years while offering a 3.1% dividend rate. If management follows their typical protocol the quarterly distribution is set to rise again in Q1 of 2013.

UPS is a low volatility issue but it could easily rebound to at least 18 times next year's earnings projection of $5.13. That would support a $92.34 one-year goal. That's 26% above the present price. Add the expected yield and this dowdy stock might well provide close to 30% in total return.

I'm not crazy, or alone, in my thinking. Morningstar and Standard & Poors each carry 4-star BUY ratings (out of 5). Both their target prices are in line with my own view. Value Line rates UPS with their highest safety rating while noting that UPS has a 10-year median multiple of 20x.

United Parcel is a 'pick and shovel' play on the overall expansion of internet commerce. Whether sales come from Amazon (NASDAQ:AMZN), E-Bay (NASDAQ:EBAY) or some other online vendor, goods need to be shipped. Barring a real economic meltdown UPS appears to be a conservative stock that offers the total package.

Disclosure: I am long UPS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.