UPS released their Q4 2019 earnings report on January 30th and shortly thereafter the stock price dropped 10%.
On February 13th, UPS announced a dividend raise of 5.2% from $3.84 to $4.04/share annually.
Given the negative sentiment around the Coronavirus in China and fears of Amazon taking over the shipping world, it’s a great time to reassess the long-term prospects of this industry leader.
My opinions are framed through the lens of a buy-and-hold dividend growth investor. Included is my fair value estimate and “common sense” (hopefully) reasoning for maintaining a cautiously bullish outlook and recently adding to my position.
Solid As A Rock
United Parcel Service (UPS) is the best in breed of the Shipping/Freight/Global Delivery/Logistics world. 2019 performance was solid. 2020 guidance is solid. The just-announced dividend increase of 5.2% is solid. They have a solid track record of rewarding shareholders. UPS has now increased its dividend for the 11th straight year, and has a great track record of 50 years of maintaining or growing it. Since 2000, UPS’s dividend has more than quadrupled. More importantly, they are forward thinking, technology-driven, and efficiency-minded. UPS continues to innovate. Automation advancements, delivery fleet upgrades to Electric and Hybrid vehicles, as well as bolstering their airplane fleet keep them poised for future success and equip them with the tools to keep up with the global eCommerce revolution. Even with direct competition from FedEx (FDX) and Amazon (AMZN) making great strides in the space, UPS is, and should remain, on the top step of the podium. A prudent, buy-and-hold dividend growth investor should seriously consider taking advantage of the short-term price drop to buy this business. I recently increased my position and my 11 year-old daughter just added UPS to her Dividend Duchess Portfolio. Let’s dig in!
Who They Are, What They Do
Who hasn’t had a big brown truck pull up to their residence or place of business? They’re everywhere. I live in a town of 8,000 people and I see them daily on my cul-de-sac. UPS is a multi-billion dollar corporation and the world’s largest package delivery company, employing nearly 1/2 million people. They operate in more than 220 countries and territories worldwide. In addition, their freight and logistics services continue to expand. The massive scale at which they operate creates a huge barrier to entry for competition. The skeptics are thinking, “I like FedEx better” and haters are probably mouthing “What about Amazon?” right now. I’ll get into that later. For now, peruse some of these stats for FY 2019 released a couple weeks ago:
Revenue = $74 Billion ($61B from shipping, $13B from freight)
Online Tracking Requests, Daily Average = 294.9 million
Packages Delivered Globally = 5.5 Billion
Daily Global Delivery Volume = 21.9 million packages/documents
Daily U.S. Air Volume = 3.5 million packages/documents
Daily Flight Segments = Domestic: 1,154; International: 1,131
Airports Served = Domestic: 401; International: 406
Backstory / Timeline
As my readers know, I love history and delving into the makings of the successful companies I analyze. Here’s a brief timeline of UPS and their modest beginnings:
- 1907 – Two teenage entrepreneurs started the American Messenger Company in a Seattle basement with a $100 loan.
- 1913 – Focus shifted to delivering packages from grocery and drug stores to customers’ homes. Name changed to Merchants Parcel Delivery.
- 1916 – The company brought on Charlie Soderstrom, an automobile expert, to manage the rapidly growing fleet of delivery vehicles.
- 1919 – Expanded to Oakland, CA and became United Parcel Service.
- 1922 – Established common carrier rights, putting them in direct competition with the US Postal Service.
- 1929 – Started offering air service through private airlines. Air service ended two years later due mainly to the economic downturn / Great Depression.
- 1930’s-1940’s – Continued growth into eastern states, even with fuel and rubber shortages during WWII.
- 1953 – Re-introduced air service using commercial flights.
- 1975 – UPS became the first package delivery company to service every address in the lower 48 states.
- 1980’s – Deregulation of the airline industry gave UPS the opportunity to start building their own fleet of planes.
- 1985 – UPS Next Day Air Service became available in all 50 states and Puerto Rico.
- 1988 – Received FAA approval, thus launching UPS Airlines.
- 1990’s – Increased efforts and $ billions invested in technology advancements and infrastructure enhancements. Web apps like Quantum View and handheld DIAD (Delivery Information Acquisition
- Device) devices carried by drivers are a couple of these efficiency innovations. * Fun fact – the use of DIAD’s saves 59 million sheets of paper or 5,187 trees per year!
- 1992 – Began tracking all ground shipments electronically.
- 1999 – UPS offered 10% of its stock to the public for the first time.
- 2001 – Acquired Mail Boxes Etc. Within 2 years, rebranded 3,000 locations as UPS Stores, making them a force in the retail market with lower UPS-direct shipping rates.
- 2005 – Started non-stop delivery service flights between U.S. and China. This led to access to 23 cities and more than 80% of China’s international trade.
- 2010 to present – Acquired more than 40 trucking and air freight companies. ORION (on-road integration, optimization, and navigation) minimizes mileage and time for drivers and maximizes cost savings and environmental impacts. Introducing and expanding the line of Electric and Hybrid delivery vehicles.
2020 and beyond – The photo above is of a pilot fleet of 35 electric trucks in use in Paris and London. These get around 150 miles on a single charge.
UPS has invested more than $750 million into alternative fuel / electric vehicles since 2009. They already have more than 300 electric vehicles and 700 hybrid vehicles across the U.S. and Europe. Further, they recently committed to purchase 10,000 more EV’s as part of an investment agreement with Arrival to build purpose-built EV delivery trucks to UPS.
Q4 2019 Earnings Results
No doubt, UPS has a history that is chock full of success and exponential growth. That doesn’t matter much for us investors that are laser focused on future returns. Let’s look at the key takeaway from the most recent earnings report announced on January 30th, 2020:
Total revenue increased to $74 billion, driven by strong volume growth in the U.S.
Operating profit grew 6.4% with margin improvement across all segments.
Q4 2019 adjusted earnings per share up 8.8% over Q4 2018.
Q4 2019 U.S. Daily Volume Grew Nearly 9%; Next Day Air Volume Up Nearly 26%. Much of this due to Amazon shipments.
Consolidated revenue increased 3.6% to $20.6 billion, due to strong average daily volume growth during the peak holiday season. Again, much due to Amazon.
Annual adjusted free cash flow exceeded $4.1 billion.
They paid $3.3 billion in dividends, a per-share increase of 5.5% over 2018.
UPS repurchased more than 9 million shares for approximately $1 billion.
“Looking to 2020, we will continue to adapt to the changing environment, strengthen our network and create new solutions to support our strategic growth initiatives and help our customers grow and compete… Given the tremendous opportunities ahead, we have elected to implement SMB initiatives now to speed up our network and broaden our weekend operations, actions that will improve our competitiveness and generate growth.” – David Abney, UPS Chairman and CEO
- Full-Year 2020 Adjusted EPS Guidance Range of $7.76 to $8.06
- Revenue is predicted to increase by 4-7%
- Operating profits projected to increase by 5-7%
- Cash from operations is expected to be around $10 billion and free cash flow is anticipated to be between
- $4.3 and $4.7 billion.
- Capital expenditures are planned to be around $6.7 billion, primarily to support global facility and automation expansions.
- UPS is also hoping to spend about $1 billion in 2020 on share buybacks.
UPS is looking to capitalize on increasing weekend delivery which is speeding up time in transit. This along with a heavy focus on expanding Small and Medium Business clients (SMB), should help catalyze growth in 2020 and beyond. They will also continue capital investments to increase efficiency and automation which should foster increased margins. They’ve also recently added new aircraft to the fleet, which allows them to capitalize on increasing volume growth.
Fair Value Assessment = Currently 10% Undervalued
My Two Cents
Referring to my chart above, I estimate intrinsic value to be around $118/share. Currently priced around $106 makes it 10% below fair value. Not a bad entry point for a Dividend Contender with a solid growth rate that’s just been raised 5.2%. That’s below the 5 year growth rate average of 7.46%, but with the current dividend of 3.78% way above 5 year average yield of 3.03%, I’m ok with it. The payout ratio is a little higher than I’d like to see and so is the debt. But it’s a capital intensive industry, and they are well versed in managing their debt. Even if you believe AMZN is going to wreak havoc in the future as they continue to expand in the logistics arena, UPS is not going to disappear, and there is still a nice margin of safety at these prices.
Skin In The Game
Talk is great. But when you put your money where your mouth is, it’s a bit more “real.” So here is full disclosure on my current position of UPS. They currently account for 2.05% of my Blue Chip DRiP Portfolio. After my most recent purchase of 20 shares @ $104.21 on 2/3/20 my current holding details are as follows:
Cost Basis Current Value Yield on Cost
63.5 $106.48 $105.02 $6,761.48 3.85% $256.55
Risks & Considerations – Amazon
Of course, there’s always the normal risks… litigation, economic downturn, black swans, coronavirus, coors light virus, and all that jazz. FedEx always lingers as a worthy counterpart for healthy competition. But let’s talk about the #1 concern and the omnipresent elephant in the parcel distribution warehouse – Amazon.
It is true. Amazon spent $8.6 billion with UPS in 2019, accounting for 11.6% of overall revenue. Some of this was due to UPS picking up capacity when FedEx broke ties with Amazon last August. AMZN is now UPS’ largest client. It is logical to think that Amazon may potentially reduce their use of UPS and handle more of their package shipping/deliveries in house. It is also rational to assume that Amazon will continue building out their shipping infrastructure and potentially open up operations to other companies in an effort to fill airplanes and take a bigger chunk out of the $400B industry. This would most definitely affect UPS adversely.
Earlier this year, Goldman Sachs estimated it would cost AMZN approximately $122 billion to catch up to FDX and UPS. That’s not chump change, but they do have the money, and I don’t doubt it is possible.
Even with UPS taking steps to strengthen and focus on their highly profitable B2B / SMB segments, the potential loss of revenue if AMZN were to leave UPS could be somewhat staggering. But then again, as Amazon has stated many times, they might not be completely “out to get” UPS, and could continue along as partners. Only time will tell.
What I Do Know
Diversification and risk management reign supreme. Although I like their chances, I’m only getting into bed with UPS for as much as I feel comfy with. Nothing is more important than sleeping well at night. I remain cautiously bullish. I feel that the AMZN threat is baked in around the $105 level and UPS will continue surviving and thriving.
Curious, what do you think about UPS? Is Amazon gonna run them out of business? Are you buying a Sprinter Van and starting a delivery business with Amazon Logistics? Let it pour in the comments below 🙂
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Author: Blue Chip DRiP
Source: Seeking Alpha: UPS: Even Amazon Can’t Keep Big Brown Down