United Parcel Service (UPS) is the largest package delivery company in the world and a prominent provider of global supply chain management solutions.
The company offers a broad range of industry-leading products and services through its extensive presence internationally, including transportation, distribution, contract logistics, ground, ocean freight, and air freight, as well as customs brokerage and insurance. Specifically, United Parcel Service operates one of the biggest airlines in the world, as well as the world’s biggest fleet of alternative fuel vehicles.
Due to the ongoing supply chain crisis, UPS’s operations have become more critical than ever. The company’s financial performance has been rather robust lately, while its latest massive dividend increase should point towards accelerating capital returns. That said, I believe that shares are relatively fully valued. For this reason, I am neutral on the stock.
Latest Results
UPS’s Q4 and full-year results came in rather strong, with the company generating revenues of $27.8 billion, an 11.5% increase compared to the prior-year period. Specifically, The U.S. domestic division, which comprises 64% of sales, experienced a 12.4% growth, while the International Package and Supply Chain Solutions segments recorded growth of 13.1% and 6.7%, respectively.
Adjusted EPS in Q4 was $3.59 per share, resulting in the company ending the year with an adjusted EPS of $12.13 compared to $8.23 for the full 2020 year. Management provided its initial Fiscal Year 2022 outlook, forecasting revenues of about $102 billion, an operating margin of around 13.7%, $5.5 billion in CapEx, and at least $1.0 billion in share repurchases.
Based on this, I estimate that UPS should be able to deliver adjusted EPS of around $12.50 this year. Amid robust profitability, management hiked this quarterly dividend by 49% to $1.52, or $6.08 on an annualized basis.
The Dividend
UPS counts 13 years of consecutive annual dividend increases. However, the dividend growth rate was rather underwhelming over the past decade. In 2019, 2020, and 2021, the annual DPS grew by 5.5%, 5.2%, and 1%, respectively. Following the recent 49% hike and management’s encouraging outlook on buybacks, it appears that UPS may be accelerating its capital returns.
The stock’s yield currently stands at around 2.9%, which, along with estimated buybacks of around $1 billion this year, should result in a total capital return yield of around 3.5% at its current price levels.
Wall Street’s Take
Turning to Wall Street, United Parcel Service has a Moderate Buy consensus rating, based on 11 Buys, eight Holds, and one Sell assigned in the past three months. At $239.74, the average United Parcel Service stock forecast implies 15% upside potential.
Valuation & Conclusion
Based on my Fiscal Year 2022 EPS estimate, UPS is currently trading with a forward P/E of 16.7. In my view, this is a fitting multiple for the stock. After all, because UPS’s results can be easily affected by the market’s cyclicality and are also sort of inflated currently, a higher multiple would be inappropriate.
I would likely consider UPS a buy below a P/E of 14, but the stock is definitely not expensive at its current one either. Hence, I am neutral on the stock.
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