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Why I Expect UPS To Deliver In The Upcoming Years


  • UPS will without doubt benefit from the rise of eCommerce.
  • The company's financials are solid, and its strategy in line with industry trends.
  • The recent price drop creates a buying opportunity for dividend growth investors.

United Parcel Service (NYSE:UPS) has underperformed the market since early 2014. There are multiple fears in the industry, namely the idea that Amazon (AMZN) will hurt their business. However, when you run the numbers, it seems that Amazon’s impact will be minimal given the increased business UPS should derive from increasing eCommerce sales in upcoming years. The valuation is attractive at this point, and I would recommend dividend growth investors to consider purchasing UPS.

Source: Mashable

4th quarter earnings increased by over $1.5/share compared to Q4 2016, reaching $1.27/share on revenues which were 11% stronger. Since then, the company’s stock price is exactly where it was this time last year at $106 after tumbling more than 20% since January, when the market didn’t react well to below consensus guidance for 2018. UPS increased its dividend by 9% giving the company a 3.4% dividend yield, thus introducing it into my screener.

The S.A.F.E. dividend stock screener is designed to find stocks which have attractive yields, a history of dividend increases, room to grow the dividend, and whose financial condition ensure dividend stability.

It screens on 5 criteria:

  • Dividend yield greater than 3%.
  • Payout ratio less than 70%.
  • Current ratio greater than 1x.
  • At least 5 years of consecutive dividend payments.
  • A positive PE Ratio.

The first two elements are the most important ratios in the screener. They ensure that I'm getting a yield which I am content with, without horrifying payout ratios. The dividend streak shows some commitment from management to return cash to investors. Positive PE means the company generated positive net income in the last year, so I know we are not looking at companies that are losing money. The current ratio is a sanity check to only include companies which can cover their short-term liabilities.

This method

This article was written by

Robert & Sam Kovacs profile picture

Robert & Sam Kovac are a father & son team specializing in building diversifed dividend portfolios. Robert has 40 years of experience as a software engineer at investment and retail banks, insurance companies, clearing houses, and the European Commission. Sam has passed levels 1 of both the CFA & CAIA programs and he holds a Masters of Economics from Sciences Po Paris, one of France’s most selective schools.

Together they lead the investing group The Dividend Freedom Tribe where they help investors achieve their retirement goals with analysis of the 120 best dividend stocks. Features include: a training course, three model portfolios, weekly in depth analysis, buy/watch/sell lists, access to MAD Dividends Plus for free, as well as a community of lively dividend investors available via chat. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UPS over the next 72 hours. 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.

These views represent the opinion of the author and not those of his company, uuptick LTD.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (51)

ARG1 profile picture
Good call and long UPS. By the way, low fuel prices will be a tail wind for UPS.
Anyone know the plans for the new Chief Transformation Officer? Possible headcount reduction?
gonji profile picture
continue in making what was once a special company into just another large company?
Equityhigher profile picture
First. UPS is not a good ole boy southern management team... very diversified group from around the world with tenure. Second. In regards the botched up TNT acquisition, it wasn’t!! The EU admitted that their model was inaccurate at the time. As a result UPS is suing for over $2B. https://usat.ly/2CYUwNA
Last, Amazon is a terrific company. Use them all the time. But you need to keep in mind that many large scale companies have their own fleet for movement of good. Amazon is no different and wants to have better control of customer experience... as Bezos had communicated multiple times. But this is B2C.. the most unprofitable segment of distribution.
Robert & Sam Kovacs profile picture
Thank you for reading and taking the time to share this information.
The drop from mid-130's to $105 is nothing more than an excellent buying opportunity of a great stock on sale. I added to my long position and I am tempted to buy even more.
Robert & Sam Kovacs profile picture
Thank you for sharing your thoughts Gregary.
While I'm a firm believer in any company that is willing to pay a $3.64 a year dividend,and still have billions in profits. That's what I call an A plus moat! So why not share more of that wealth with the hard working employees that break their backs every week to make sure people get what they ordered in a timely manner. So if it offends certain people that this company is willing to keep helping its former employees through the pension plan that they helped pay for then I say ,they're either jealous or very narcissistic, or more than likely they're just greedy. Share the wealth with those that helped make it is all I'm saying even if it's through the pension plan.
kaplanassetmgt profile picture
Those previously well paid employees should have provided for themselves. They should have had their own IRA. As they die, it will reduce the obligation created in a different era. That will help current employees earn more and strengthen the company. If the company does nopt survive, the pensions will die too.
RE: Amazon and UPS
As in ant business parts of it are far more profitable than others. Do the their volume Amazon pays FAR lower rates then others do. Amazon-Amazon will deliver only to the FORMERLY most profitable ustabe delivered by UPS and FEDEX.

OH, and UPS and FEDEX will need to hold excess capacity to be needed at peak holiday season. Yet, another loss of PROFIT.
Robert & Sam Kovacs profile picture
Well given that Amazon is testing it in LA and thinking of expanding to other cities would indicate that the Amazon delivery vehicles would be for local deliveries, which would be mostly Prime deliveries, which is very low margin business for UPS.

Thank you for joining the conversation, it is appreciated.
humour profile picture
During last 10 years UPS delivered about 7.3% annual return + dividends. I'm sorry but in such a bull market this is very poor performance. Comparing to FDX, XPO or ODFL UPS looks pathetic.
humour profile picture
I meant "comparing to returns".
Robert & Sam Kovacs profile picture
Yes it has lagged, thankfully I'm not suggesting you invest 10 years ago, but today.

Thank you for sharing your thoughts and joining the conversation.
Good, thoughtful review. Long UPS and will likely add more.
Robert & Sam Kovacs profile picture
Thank you for your kind words.
ARG1 profile picture
I added more shares to my portfolio on Friday.
Robert & Sam Kovacs profile picture
Thank you for the kind words.
PACKER man profile picture
Exc art; will be adding to UPS; thx!
Robert & Sam Kovacs profile picture
Thank you for the compliments, Packer man
IMO UPS is a trading stock and FDX is a buy & hold. UPS has execution issues every peak season. They also bungled the acquisition of TNT and lost hundreds of M$ In the process. Compare stock performance of UPS vs FDX in the last 2 years and see for yourself.
Time for UPS to catch up.

Question who has been brought up many times
but the answer is still a mystery.

Who manufactures their trucks ?
loucifer profile picture
Thank you for providing the voice of reason. UPS has mismanaged their business for the last ten years. Now they have undertaken massive debt obligations in order to catch up.

This article makes no mention of their current debt situation which is not ideal. I suspect slowing dividend growth and if a recession were to hit, a reduction in the dividend
Equityhigher profile picture
Victor... get your facts straight. EU admitted their model was incorrect and most likely the acquisition should have passed. https://usat.ly/2CYUwNA
FinalAnalysis profile picture
There is room for Amazon and UPS. Own them both.
maps666 profile picture
UPS is a good hedge against Amazon stock falling -- while benefiting from Amazon growth. That is the best reason to own them both.
Robert & Sam Kovacs profile picture
Interesting point of view maps666, thank you for sharing your thoughts.
Finally, UPS is getting recognition. Thanks for all the great messages
and your obvious understanding of the company and it’s numbers. UPS is a keeper, I’ve been holding their stock for quite some time, since 1961 (that’s not a typo) yes, 1961. The dividends have been wonderful and the growth as you know, gradual (very gradual). I believe that the daily punches UPS takes from journalists that don’t fully understand the company are unfair and hurting the current share price. UPS has had its share of Amazon type challenges through the past 110 plus years and charged through with excellent management techniques and creativity. I personally can’t wait for Amazon to make this attempt at delivery and live through the growing pains without the knowledge they need. The fragmented process they are now using will not work if all deliveries are to be done in house. If I’m wrong and they are successful, that’s ok too. Not to many years ago FDX Ground didn’t exist, today they do and there are still too many packages to handle. All will be ok.
kaplanassetmgt profile picture
I don't see the dividend doubling within the next 5-7 years. I see increasing annual dividends but I really don't care if it takes 10 years. The lower the price goes, the better for my grandson. He is 19 years old and owns a few shares of UPS and has it set as a DRIP. Hence, the lower it goes, the better off he is. He has a 50+ year horizon. My biggest concern is legacy pension and healthcare programs for retired workers. No company should have a defined pension plan anymore. The extraordinary low interest rate available has hurt all pension plans. By the way, I think you have done an excellent job of putting UPS into a positive prospective. Hopefully, no analyst sees it and recommends the stock causing it to go higher. I am looking for a quarterly dividend of $.97 beginning next year.
Robert & Sam Kovacs profile picture
Right whether it takes 7 years or 10 years will only affect the decision if your horizon is not far out.
Thank you for sharing your thoughts
Great analysis of UPS Robert. I totally concur with your thoughts on this great company. Amazon might be biting off a little more then they can chew in their entering this industry, but I strongly feel that UPS will continue to grow and prosper, with or without Amazon. I too like these valuations and am happily adding to my position of UPS at this time. Thanks for the article Robert! ......long UPS.......:)
Robert & Sam Kovacs profile picture
Thank you for your kind comment. I also believe UPS will continue growing.
UPS is a long term stock to hold onto, and not get out as soon as the A word is spoken. Hold on tight it will be a great run for a long time.
Robert & Sam Kovacs profile picture
"The A word" , made me chuckle.
Thanks for sharing your thoughts.
Mitch Zeitz profile picture
Interesting work. I would have liked to seen an analysis of dividends as a percentage of FCF. Dividends are paid out of cash flows, not "earnings" and it looks like FCF in 2017 was negative for the first time in at least 10 years. Previously, there has been no pattern to FCF, with it bouncing up and down erratically. However, during the previous 10 yrs it has always been sufficient to cover dividend payouts. Thanks.
Hi, Mitch. You know, I looked at UPS' free cash flow as well, and it is more 'lumpy' than I'd prefer. I'm not an accounting guy; from aeaglebob's comment above, perhaps the $5B pension contribution zapped free cash flow in '17; but there was a similar dive in FCF in '07; not sure what happened then; perhaps others do?

Anyway, I also looked at UPS' operating cash flow, and, ignoring/rationalizing '07 and '17 as one-offs, UPS' OCF looks pretty good. My take is that the difference in UPS' OCF and FCF profile is a series of 'lumpy' capital investments.

Looking at a UPS preso dated 11/1/2017, it's clear UPS is investing in automation and 'smart' logistics; I'm not sure how far along UPS is at in this capital spend, but I'm thinking results ought to be free cash flow positive, and this should show up relatively soon.

Best of luck.
2017 2018 2019 2020 2021
eps 6.01 7.21 7.86 8.44 9.38
cf 1.69 11.19 12.66
Hi Chicago...
Not 100% sure, but believe 2007 was the year UPS “ bought out” the Teamster pension plan. It seems that the Teamsters were utilizing UPS funds to cover other companies pension liabilities. UPS now has control of all UPS related pension funds. They plan a conversion to a robust 401k in next few years.
Good review! Completely agree with you on your dividend growth analysis.

Been a shareholder and have closely followed UPS for years. The current PE based on earnings estimates is 14+. This company always runs a PE about 21-22 and will again after Q1 and Q2 results are reported.

Surprised you did not mention the $5 billion payment made to the pension fund in late 2017, which, while affecting 2017 earnings, was completed while corporate tax rates were still 35%. This will now be a tailwind for 2018 results. Smart decision!

Seems that many of the capital expenditures are going for improved automation and new facilities that will be state of the art. Obviously, the payoff for these outlays come afterwards, however, they are cumulative...savings added upon savings as each facility is initiated. Every investor should be pleased with that decision!

Yes, much has been said about AMZN. I have mentioned before that the cost structure of this business is based upon labor rates being applied to density; packages per stop and stops per mile. AMZN will have only one advantage...labor rates. And with that advantage comes a slew of other issues; claims, theft, turnover, reliability, appearance and such. Density (excluding peak) will be horrible. I believe AMZN utilizes the USPS, post office, as the USPS has priced themselves into probable insolvency. Congress will ultimately put a stop to this madness! So, where will AMZN go? To their adversaries?

I like AMZN, both their products and stock, however, this self-delivery endeavor will be a huge black hole with negative returns. I have no doubt they will lick their wounds and come back to FDX/UPS for their distribution requirements...maybe with fewer discounts this time around!
Mitch Zeitz profile picture
"AMZN will have only one advantage."

Two actually - cost of capital is lower due to the bubblicious valuation of their equity (as long as that lasts anyway). Still, I completely agree with your post.
Refreshing article about UPS. Makes me feel better about my decision to drip this stock since 2000. Good job, thanks for sharing.
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