Stock Analysis & Ideas

FedEx, UPS: 2 Intriguing Dividend Stocks Following Their Decline

Story Highlights

Package-transportation giants FedEx and UPS have seen their share prices decline notably lately amid fears of reduced earnings ahead. Following their sell-off, the two companies appear attractively priced, which could especially appeal to dividend-growth investors.

FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS) are the two leaders in package delivery, transportation, logistics, and related services across the globe. The two companies essentially operate a duopoly in the space and offer solid investment cases for dividend investors due to their recent decline in share price.

While most people are familiar with their iconic vans, the two companies also operate some of the biggest airlines in the world, as well as the biggest fleets of alternative-fuel vehicles globally.

Up until recently, FedEx and UPS were enjoying fantastic market tailwinds due to supply-chain bottlenecks establishing that their transportation services were more important than ever. For this reason, both FedEx and UPS posted record revenues last year, which helped them achieve economies of scale that benefited their profitability.

Unfortunately, investor sentiment has worsened lately. With interest rates on the rise, economic activity is expected to slow down, which is likely to reduce demand for freight services. Additionally, with inflation remaining at sky-high levels and fuel costs significantly beyond their historical averages, both FedEx and UPS are likely to have their margins compressed.

Consequently, shares of FedEx and UPS have declined by about 36% and 16% year-to-date. FDX stock has been harmed notably worse due to the company recently reporting preliminary Q1 results that missed estimates by a wide margin. The miss was mainly attributed to global volume softness. The company also withdrew its Fiscal 2023 earnings forecast, further spooking investors.

While the sell-off may indeed be justified to some extent, I believe that both companies are of high quality. They rarely go on sale, so it may be a good opportunity for investors who were previously discouraged from buying them amid their elevated valuations to reconsider.

Additionally, both companies feature robust dividends that have never been cut. With their yields now pushed higher, FedEx and UPS likely present intriguing dividend-growth opportunities as well.

Are FedEx and UPS Worthwhile Dividend-Growth Opportunities?

With both stocks declining notably lately, FedEx and UPS have had their yields pushed to 2.9% and 3.4%. Considering both companies have demonstrated their intention and capabilities to grow their dividends over time, these yields may provide good entry points for dividend-growth investors.

You may assume that due to their cyclical operations, the dividends of FedEx & UPS may be unreliable during market downturns, similar to the present environment. However, both management teams have made sure to increase payouts only when each company’s profitability reaches a new, higher plateau that can be sustained over the long term, to be prudent.

Consider FedEx, for instance. The company held its dividend stable in 2019 and 2020 when its net income came under pressure. With its profitability proliferating last year, FedEx increased its quarterly dividend by 15.4%, followed by another massive increase of 53.3% this year. Importantly, even with such a massive dividend hike and analysts expecting a decline of 26.4% in FedEx’s EPS this year amid the recent challenges, the payout ratio still remains at a comfortable 30.3%.

UPS also features solid dividend qualities, featuring a track record of 13 successive annual hikes. The dividend growth rate was somewhat bland over the past few years. In 2019, 2020, and 2021, the annual dividend per share climbed by 5.5%, 5.2%, and 1%, respectively. Similar to FedEx, however, with the company’s profitability prospects improving last year, the latest dividend increase was by a massive 49%. Further, despite this sizable increase, UPS’s payout ratio also stands at around 47.2%, based on its consensus EPS estimates for the year.

Accordingly, I support that while this year and possibly the next may be tough for the two freight giants, I believe that their dividends remain well-covered, and investors should not fear a cut. Additionally, their growth prospects should reinvigorate once the ongoing macroeconomic turmoil eases.

How Much Should You Pay for FDX and UPS Shares?

Based on FedEx’s and UPS’s consensus EPS estimates for the year, the two companies are trading at P/E ratios of 10.6x and 13.6x, respectively. In my view, both multiples are rather fair, even if earnings growth slows down in the medium term. UPS is trading at a higher multiple likely due to its higher yield, as it offers investors a higher margin of safety. In my view, a low-teens multiple makes for a worthwhile entry point for both stocks as the potential for a valuation multiple expansion over the medium term also remains.

What is the Price Target for FDX and UPS Shares?

Turning to Wall Street, FedEx has a Moderate Buy consensus rating based on 11 Buys and 11 Holds assigned in the past three months. At $236.14, FedEx’s average stock price prediction suggests 50.4% upside potential.

Regarding UPS, analysts appear slightly more conservative but still expect meaningful upside. The stock has a Moderate Buy consensus rating based on seven Buys, seven Holds, and one Sell assigned in the past three months. At $207.79, the average United Parcel Service price target indicates 17% upside potential.

Conclusion: Quality Companies at a Reasonable Price

Following FedEx’s and UPS’s share declines lately, it appears that the package transportation duo is trading at rather attractive price levels. Dividend-growth investors are likely to appreciate the companies’ prudent but worthwhile dividend-growth track records as well.

Still, their investment cases likely demand that investors who are willing to allocate capital are looking into the long term, as short-term macroeconomic-related headwinds are likely to continue to apply pressure to both names.


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