UPS Strong on Dividends, Buybacks Despite High Operating Costs

United Parcel Service’s UPS efforts to reward its shareholders through dividends and buybacks are praiseworthy. However, high fuel costs are limiting bottom-line growth.

Factors Favoring UPS

We are encouraged by UPS’ free-cash flow-generating ability. UPS had generated a free cash flow of $5.1 billion even in the coronavirus-hit 2020. In 2021, the amount more than doubled to $10.9 billion. In first-half 2022, UPS generated a free cash flow of $6,895 million compared with $6,804 million in first-half 2021.

Robust free cash-flow generation by UPS is a major positive and leads to an uptick in shareholder-friendly activities. UPS paid out dividends worth $3,437 million in 2021, up 1.9% year over year. In 2021, UPS repurchased shares worth $500 million, up 130% year over year. UPS paid out dividends worth $2.6 billion in first-half 2022. It aims to reward its shareholders to the tune of $8.2 billion in 2022 through dividends ($5.2 billion) and share buybacks ($3 billion).

The deal with ESW, an e-commerce company, inked in March 2022 further enhances UPS’ capabilities regarding e-commerce. This e-commerce growth is likely to bolster UPS’ top line. Even though demand for online shopping slowed down from the pandemic peak with the reopening of the economy, the figures are higher than the pre-pandemic levels.

To meet the anticipated demand swell in the upcoming holiday season, UPS announced plans to add more than 100,000 seasonal workers throughout the United States. Additional workers are needed to repeat UPS’ success story witnessed last year regarding timeliness. Therefore, the decision to hire additional workers to meet the anticipated surge in package delivery demand seems prudent. Strong performance in the holiday season is likely to boost the UPS stock.

UPS currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Risks

Supply-chain disruptions are a bane for UPS. Inflationary pressures and labor shortages are also haunting UPS. In second-quarter 2022, shipping volumes declined due to the shift in the spending pattern of consumers from goods to services. In the June quarter, consolidated average daily volumes declined 4.8% year over year.

High operating expenses are hurting UPS’ bottom line. Due to a 69.4% increase in fuel expenses, operating expenses increased 5.1% in first-half 2022. The metric is likely to be high in the second half too due to escalated fuel costs.

High capital expenditures may also be a downside. UPS now expects current-year capital expenditures to be $5.5 billion, well above the 2021 levels. The increased capex guidance, even though aimed at long-term benefits, may dent current-year profit margins.

Shares of UPS have declined 10.7% in a year’s time compared with its industry’s 21.2% decrease.

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Stocks to Consider

Some better-ranked stocks in the Zacks Transportation sector are Triton International TRTN, C.H. Robinson CHRW and GATX Corporation GATX

Triton is being aided by the gradual increase in trade volumes and container demand. TRTN expects container demand to remain strong throughout 2022. Measures to reward its shareholders through dividends and buybacks instill confidence in the stock.

Triton has an expected earnings growth rate of 22.4% for the current year. TRTN’s bottom line outpaced the Zacks Consensus Estimate in each of the last four quarters, the average being 7.5%. TRTN currently flaunts a Zacks Rank #1 (Strong Buy).

C.H. Robinson is being aided by an improving freight scenario in the United States. Efforts to control costs also bode well. Measures to reward its shareholders instill confidence in the stock.

CHRW has a pleasant earnings track record. The bottom line surpassed the Zacks Consensus Estimate in three of the trailing four quarters (missing the mark in the remaining one). The average beat is 24.2%. The stock has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 17.3% upward over the past 60 days. C.H. Robinson currently carries a Zacks Rank #2 (Buy).

GATX is being aided by the improving railcar demand scenario. We are also upbeat about its measures to reward its shareholders. GATX has an expected earnings growth rate of 17.6% for the current year.

The Zacks Consensus Estimate for GATX’s current-year earnings has improved 2.1% over the past 90 days. It delivered a trailing four-quarter earnings surprise of 28.9%, on average. The stock currently carries a Zacks Rank of 2.

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United Parcel Service, Inc. (UPS) : Free Stock Analysis Report
 
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