FedEx: A Low-Risk Stock Set to Truck Higher Next Year

When I was asked to pick one stock to write about for InvestorPlace that I was confident would do well next year, I immediately started thinking of companies that should benefit from a steadily improving U.S. economy.

Don’t get me wrong. I don’t think the economy is going to surge in 2012. But I don’t think it’s going to pull a Tom Petty and freefall out into nothing, either. With that in mind, I screened for companies with low amounts of debt, decent earnings growth prospects, an attractive price and a dividend.

I think 2012 will be a lot like 2011. Safety first, please!

One stock popped up that immediately intrigued me: FedEx (NYSE:FDX). Consider it the one stock that I’d want to be marooned with on a remote island if you will. (“Wilson!”)

There are plenty of reasons to like FedEx. The valuation is compelling, at just 13.5 times fiscal 2012 earnings estimates. That’s a bit of a discount to its top rival UPS (NYSE:UPS), which has a forward P/E of about 15. And if anything, you can argue that FedEx deserves the premium. Analysts forecast an annual earnings growth rate, on average, of 16% over the next few years, compared to an estimate of just 11% for UPS.

FedEx also said in December that it’s boosting rates for its ground and home delivery services in 2012. That news follows rate hikes for its freight and express services announced earlier in the year. While that may be bad news for consumers, it should be music to the ears of investors. Any company that enjoys pricing power right now would seem to be a good bet.

Yes, the U.S. economy is not really in great shape. Yet it is still growing, despite the problems in Europe. And there are some gradual signs of recovery in the U.S. job market that bode well for FedEx too. I don’t want to get overly simplistic. But fewer people out of work should lead to greater demand for all types of consumer goods (“stuff,” as the late great George Carlin would say) that needs to get shipped.

Then there’s the colossal mess that is the U.S. Postal Service. With the USPS cutting back on next day First Class mail delivery and considering abandoning Saturday service, it stands to reason that FedEx should be able to steal some business from the Cliff Clavins and Newmans of the world. (Remember when NBC’s Thursday night sitcoms really were Must-See TV? Sigh.)

Sure, FedEx doesn’t pay a huge dividend. At 52 cents annually, it yields just 0.6%. UPS, however, has a dividend that yields 2.9%. So if you’re a sucker for income, then go ahead and ? logistics. Big Brown may be for you.

But FedEx has steadily bumped up its dividend since it began paying one in 2002. The payout has increased by 160% over the past 10 years. Barring a major shock to the economy that blasts its earnings and cash flow, investors can likely count on another special delivery in the form of a dividend hike sometime during the summer.

FedEx may not be flashy. But that’s kind of the point. In a market where volatility seems to be the new black, you could do a lot worse than a stable blue chip with steady earnings growth.

Paul La Monica is an editor at CNN Money and the brains behind the news outlet’s daily markets column, The Buzz. You can email him here or follow him on Twitter via @Lamonicabuzz.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

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