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United Parcel Service (UPS), a package delivery company, provides transportation, logistics, and financial services in the U.S. and internationally. It operates in three segments: U.S. Domestic Package, International Package, and Supply Chain and Freight. UPS is part of the Services Sector and Air Delivery and Freight Services Industry.

Dividend Reliability

A stock's dividend reliability is determined by its dividend payment history as well as its current financial health. A total of four points are available:

  • The number of Consecutive Dividend Payments -- 10 to 25 Years = 1 Point; More than 25 Years = 2 Points
  • Free Cash Flow Payout Ratio -- Less than 60% = 1 Point
  • Debt to Total Capital -- Less than 45 % = 1 Point

Dividend Growth

A company needs to be growing its dividend on an annual basis. The growth of its dividend should be at a respectable rate, and the free cash flow payout ratio should not be increasing over time. A total of four points are available:

  • Number of Consecutive Dividend Increases -- 10 to 25 Years = 1 Point; More than 25 Years = 2 Points
  • 1 Year Free Cash Flow Payout Ratio vs. Avg. 5 Year -- 1 year free cash flow ratio < Avg. 5 year = 1 Point
  • 1 Year Dividend Growth Rate vs. Avg. 5 Year --1 year dividend growth rate > Avg. 5 year = 1 Point

Fair Value

If we're going to buy a stock, we don't want to purchase it went its overvalued. A total of 2 points are available:

  • Current P/E vs. Avg. 5 Year P/E --Current P/E < Avg. 5 Year P/E = 1 Point
  • PEG Ratio -- PEG < 1.5 = 1 Point

Factor

What we want

Actual

Points

Dividend Reliability

Consecutive dividend's paid > 10 years

14 yrs

1

Free cash flow payout ratio < 60%

41%

1

Debt to total capital < 45%

61%

0

Dividend Growth

Consecutive dividend raises > 10 years

3 yrs

0

1 yr free cash flow payout less than or equal to Avg. 5 yr cash flow payout

41%< 79%

1

1 yr dividend growth rate greater than or equal to Avg. 5 yr dividend growth

9.6%> 6.4%

1

Fair Value

Current P/E < Avg. 5 year P/E

21 < 56

1

PEG ratio < 1.5

1.2

1

Total Score

6/10

Strengths: Reliable courier service around the globe, delivers more than 15 million packages in over 200 countries and territories. UPS has experience of more than 100 years in the courier industry. It has a strong distribution network nationally and internationally and strong brand in the industry.

Weaknesses: A strong union presence limits the company expansion options and affects its margins. UPS needs to expand usage of alternative sources of energy to reduce transportation cost.

Opportunities: Agreement with online merchants will increase the business. Expansion of Supply Chain and Freight operations.

Threats: Rise in fuel prices will increase the cost of services. UPS has been facing strong competition from national and international players in the industry include FedEX, DHL, USPS, Canada Post, FCML Worldwide, LDH Express, Deutsche Post (and its subsidiary DHL), Royal Mail, Japan Post and India Post.

Conclusion

UPS scored 2 points in dividend reliability, 2 points in dividend growth, and 2 points in fair value for a final score of 6/10 points, which rates it as a Hold to revisit in a year.

Up until 2009, UPS was establishing itself as a strong dividend growth company. Rising fuel costs and an economic recession took a big toll on the company causing it to freeze its dividend for two years. The company also experienced a negative free cash flow in 2007, suggesting that management was not fully prepared to deal with the economic conditions of that time. Although financials appear to be back on track for the company, rising fuel costs could again have a strong effect on UPS's free cash flow in the near term. This negative affect would likely lead management to be conservative with upcoming dividend increases as they better prepare themselves for future macro economic challenges. Because of the current high fuel prices and recent dividend freeze, I am going to pass on UPS for my dividend growth portfolio for now.

Click to enlarge image.

Source: UPS Dividend Growth Analysis: Recent Dividend Freeze And Fuel Costs A Concern