Invest in a Stable, Dividend-High Shares that You Can Hang Onto for a Full Decade
Invest in a Stable, Dividend-High Shares that You Can Hang Onto for a Full Decade
Presently generating a 5.1% return, investing $100k in UPS (UPS dropping 0.56%) will yield an annual income of $6,550. Although there are concerns regarding the organization's operations and overall revenue prediction for the year, UPS still emerges as a promising choice for long-term investors. Here's why.
UPS's Dividend Remains Secure
The reason behind UPS's impressive 5.1% yield is some market uncertainty surrounding the company's dividend and its capacity to consistently enhance the dividend. This apprehension is entirely rational, considering management's stated goal to pay around half of its adjusted earnings per share (EPS) in dividends. Unfortunately, with market projections estimating only $7.49 in EPS this year, the current dividend of $6.52 equates to 87% of the EPS.
Management was quizzed about the dividend's sustainability during an earnings call earlier this year. CEO Carol Tome reassured analysts, "There's no intent to reduce the dividend just to balance those figures out." In simpler terms, the dividend won't be decreased to align with the goal of paying a dividend equal to 50% of earnings. Instead, management vows to enhance its earnings to restore the ratio to 50%.
UPS's Recovery is Underway
Luckily, there are sound reasons to believe in their ability to do so. Following two years of diminishing package volumes in the domestic US market, UPS has managed to revive its volumes, and its revenue has shown growth once more.
In addition, the company is now past the increase in labor costs from the labor agreement completed at the end of a lengthy negotiation last year. This makes future cost comparisons more straightforward. Furthermore, UPS reported a 4.1% year-over-year decrease in cost per piece in the third quarter, a substantial margin expansion.
Moreover, UPS plans to curb printing costs by $1 billion by cutting 12,000 jobs in 2024 to accommodate market demand.
Overcapacity in the Industry Will be Adjusted
As per the March Investor Day presentation, the US small-package market shifted from an average daily package volume shortage of 6 million packages during lockdowns to a capacity surplus of 12 million packages in 2023/2024.
The surplus originates from an unanticipated decrease in delivery volumes due to persistently high interest rates curbing economic activity (as well as customers opting for lower-cost delivery options) and an industry-wide response to cope with the capacity shortage during lockdowns.
Even though volumes are gradually improving, lower interest rates in 2025 should stimulate economic activity and consequently, package deliveries.
UPS's Long-term Strategy Remains Intact
Although the rise of lower-revenue-per-piece deliveries is far from ideal for UPS, it's an inevitable reality of the market today. Despite navigating through a challenging period, management is steadfastly focused on growing its business in small and medium-sized enterprises (SMEs) and healthcare.
For instance, the Investor Day plans outline UPS's goal to amplify its healthcare-related revenue from $10 billion in 2023 to $20 billion by 2026. Similarly, management aims to boost its US SMB market penetration from 29% in 2023 to 40% in the long term.
Furthermore, UPS continues to invest in modernizing its infrastructure, including the growth of automation and smart facilities. These investments should contribute to higher productivity, enabling UPS to reduce costs by consolidating locations.
Challenges in the Short-term, Opportunities in the Long-term
Though the company may not meet its full-year guidance this year, the current market price does seem to reflect some uncertainty about this possibility. If UPS manages to meet its targets, this stock could see substantial gains.
In the long term, with a promising outlook, UPS appears well-positioned to sustain its dividend and look to grow earnings to reduce the payout ratio. All things considered, the stock represents an excellent value for patient investors.
Investing in UPS, despite its current 0.56% drop, can still yield an annual income of $6,550 due to its high 5.1% return. Management's commitment to maintaining the dividend and focusing on growing revenue in sectors like SMEs and healthcare, along with investment in modernizing infrastructure, makes UPS a promising choice for long-term investors willing to invest their money in finance.