- Average annual growth in dividends of 7.5%.
- The diversification efforts will enhance the revenues over the long-term.
- Low payout ratio will allow the company to continue growth in dividends.
United Parcel Service (NYSE:UPS) is one of the largest package delivery companies in the world. The company delivers 1.1 million packages each day to cater to approximately 7.7 million consignees in over 220 countries. These businesses are categorized under conservative investments and offer stable and continued growth. Investors looking for long-term investments with stable growth should surely look at these businesses. However, the industry remains very competitive with strong contenders like FedEx (NYSE:FDX). Still, emerging markets offer decent growth opportunities to these companies and there are opportunities present to further expand the operations. In this article, we will analyze the dividend performance, future dividend growth and growth prospects of the company.
Dividend growth for UPS has been pretty strong over the last ten years. UPS has shown consistent improvement in distributing incremental cash flows to its shareholders, and the company has grown its dividends at an average annual growth rate of about 7.5% since 2009. Currently, the company pays an annual dividend of $2.68 per share, yielding 2.8%. During the last year, UPS distributed cash dividends of $2.26 billion. Furthermore, the company repurchased shares worth $3.8 billion, which means the total cash returned to the shareholders stood at $6.1 billion.
Coming to the payout ratio - the payout ratio based on free cash flows is pretty strong for UPS. The total dividends paid during the last year stood at $2.26 billion, and free cash flows for the same period were $5.24 billion, which puts the payout ratio of UPS at around 43%. The payout ratio of UPS gives the company considerable room to grow its future dividends as the company grows dividends at around 8%; we believe the cash flows have enough room to support the growth over the short-medium term. UPS's payout ratio is lower FedEx - a comparison of the two companies is given in the table below.
Dividend per share
Average Growth in Five years
Free cash flows (Billions)
Dividends paid (Billions)
FedEx has been growing the dividends at a slightly higher rate than UPS over the last five years, and the company has lower payout ratio as well. However, per share dividend of the company is extremely low which give it the dividend yield of just 0.5%. UPS has increased its operational cash flow by 1.22% over the last year. UPS plans to spend about $2.5 billion in capital expenditures over the coming year on maintenance and replacement of the assets. The company is also investing in technology in order to achieve higher operational efficiency and smoother operations.
Developing economies and emerging markets of the world are the key growth drivers for these companies. These markets have a huge number of potential customers using the courier services in their business transportations purposes. Over the last year, UPS announced the expansion of its operations in China. The two new facilities will provide distribution and warehousing solutions to shippers who want to reach customers within China. Similarly, the purchase of two Puerto Rican companies will boost the presence in the global markets.
The businesses in the industry are now taking a leap into technology and innovation. As I mentioned at the start of the article, these businesses show conservative growth and companies are looking to diversify in order to enhance the growth. UPS's acquisition of U.K based Polar Speed is one of the steps taken by the company to diversify its revenues. Polar Speed thermo logistics is a leader in active-temperature-controlled pharmaceutical supply chain solutions in U.K with its core focus is on active temperature-controlled deliveries to pharmacies, wholesaler and end patients. This will benefit UPS's shifting interest in other profitable businesses, and enable the company to reap considerable benefits in the future.
The analysis of the cash flows and the dividends of the company shows that there is considerable room for UPS to enhance its dividends. The payout ratio of about 43% is low and the company will continue to grow its dividends. Furthermore, the efforts to increase the global operations as well as diversification will allow the company to achieve substantial growth in revenues as well as profits. As a result, we will likely see a steady increase in the stock price. UPS is a solid long-term investment with growing dividends, and the shareholders should continue to benefit from the strong financial position of the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.