United Parcel Service (UPS) raises dividend by 6%, but rising capital expenditures will effect 2017.

United Parcel Service’s (NYSE:UPS) dividend was increased by a solid 6%.  Its overall yield is now a healthy 3.09%. The firm started paying a dividend in 2000.

United Parcel Service is the biggest package firm in the world. It operates over 500 planes and over 100,000 trucks for global delivery.  It operates in three distinct units including U.S. Domestic Packaging, International Packaging, and Freight. Freight includes ocean freight, truckload brokerage, and additional distribution options for customers.  It operates in over 200 countries.  The firm is headquartered in Atlanta, Georgia and was founded in 1907.

UPS has maintained a solid three-year growth rate of dividends of 7.3 percent. UPS currently ranks 1st in dividend yield within the large cap services, air delivery & freight category. The quarterly dividend for the March payment will be $0.83 versus the prior year rate of $0.78 per share. UPS is a member  of our Top 100 Dividend Stocks.  (see below).

top-100

The dividend will be paid at the new higher rate on March 8, 2017, to shareholders of record at close of business on February 21, 2017. United Parcel Service Inc. is currently priced at $108.90. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
2/21/2017 0.83
11/9/2016 0.78
8/12/2016 0.78
5/12/2016 0.78
2/18/2016 0.78
11/12/2015 0.73
8/13/2015 0.73
5/14/2015 0.73
2/19/2015 0.73
11/13/2014 0.67
8/14/2014 0.67
5/15/2014 0.67
2/20/2014 0.67
11/14/2013 0.62
8/15/2013 0.62
5/9/2013 0.62
2/21/2013 0.62
11/15/2012 0.57
8/16/2012 0.57
5/10/2012 0.57
2/16/2012 0.57
11/9/2011 0.52
8/18/2011 0.52
5/12/2011 0.52
2/10/2011 0.52
11/10/2010 0.47
8/12/2010 0.47
5/13/2010 0.47
2/11/2010 0.47


Analysis of UPS is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 3.09% 134
Dividend Growth (3-7 year avg) 7.8% 260
Forward P/E 16.72 134
S&P Financial Rating A+ 80
Beta 0.85 100
Total Score 708

% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2017 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
3.09% 7.3% 8.4% 74 1.45 1.10 1.90 2.37% 3.23%

Final Analysis;

Positives;

  • UPS’ dividend yield is above that of the S&P 500 Index.
  • UPS has paid out a dividend consecutively for the past 17 years.
  • UPS maintains an investment grade rating of A+.
  • UPS has maintained a three-year growth rate of dividends of 7.3 percent.
  • UPS’ current dividend yield (3.09%) is above its five-year average historical dividend yield.
  • UPS maintains a beta of 0.85, lower than the average company.

Negatives;

  • UPS offered a weak outlook for 2017.

Latest Earnings & Analysis:

UPS issued its earnings data on January 31st. The company reported $1.63 earnings per share (EPS) for the quarter, missing the consensus estimate of $1.68 by $0.05.   The logistics company missed fourth-quarter profit expectations by a sizeable margin.  The company maintained an actual net loss of $239 million, or 27 cents a share. Revenue did increase by 5.5% to $16.93 billion in Q4, but that figure was also below the average analyst estimate of $17.00 billion.  U.S. domestic package revenue rose by over 6% to $10.9 billion while international package provided $3.3 billion in revenue. For 2017, UPS expects adjusted EPS of $5.80 to $6.10.  This is also well below expectations from Wall Street of $6.15.  UPS set 2017 targets for mere 1%-6% earnings growth from 2016’s total of $5.75. UPS forecast revenue growth of 5%-7% for next year.  One item of note is capital spending. UPS indicated that capital spending will rise by $1 billion from last year to $4 billion.  Thus, UPS is expecting higher revenue growth, but higher expenses that will offset revenue increases. The firm also voiced that the logistics company would be impacted by over $400 million of currency headwinds for next year. This was 20% above analyst expectations. Lastly, CEO David Abney indicated on the conference call that a mix to lower revenue products was also a cause of the earnings miss.

On the positive side, UPS ground revenue did rise by over 7%, strong growth for any global company.  The international package unit has also maintained eight straight quarters of double-digit earnings growth.  The Freight segment did not perform as well. This unit struggled as the industrial portion of the global economy has not strengthened as much as expected.

My new target for UPS 2017 EPS is $6.05, toward the higher end of the firm’s guidance. This would represent just over 5% year-year growth and slightly below the last three years’ average growth numbers. As with Fedex, UPS has realized its must accelerate spending to properly handle growing volumes. The firm specifically mentioned that e commerce traffic is growing so fast and resulting in greater volume that it is clogging up its logistics network.  Shipments in high demand periods like Christmas are exploding.

The most recent report from UPS is not stellar.  The extra costs for capital expenditures, higher mix of lower margin products, and currency headwinds are no doubt effecting profitability.  But the advantage for the firm is that the new spending puts UPS in position, along with FedEx, to dominate the market in the next several years given the high barriers to entry given the network necessary to fulfill on-time deliveries to customers. Overall, the increase spend should result in higher profitability by 2018.

UPS is a strong generator of cash and has been for over a decade. In 2016, UPS bought back 25.5 million shares for $2.7 billion and paid out $2.8 billion in dividends. The firm’s dividends have risen from 0.68 cents a share to $3.12 for 2016. UPS stock’s current payout ratio is 54%, low for most 3% plus payers. It gives the firm plenty of runway to increase its dividend in the coming years.  UPS is trading at $108.90 and based upon expectations of $6.05 a share for next year, it is trading at 18 times 2017 earnings expectations. Its price/sales ratio is in the middle of the historical range and its yield is slightly above historical averages. Although a price in the low $100s would be a better entry point for long-term dividend investors, UPS is still among the 100 best dividend paying firms in the globe.

2014.Net Income chart

Source: UPS

Based on the firm’s consistent dividend growth history, above average yield, investment grade rating and low beta, United Parcel Service Inc. qualifies as one of our Top 100 Dividend Stocks

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United Parcel Service Inc. Dividend Yield Historical Chart (Click to enlarge)

ups4

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

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