UPS Stock Can Handle the Load

UPS managed to out-earn its dividend in the March quarter

In the center of the novel coronavirus pandemic, the question on income investors’ minds is whether any stock can afford to pay its dividend. United Parcel Service (NYSE:UPS) stock can handle that load.

UPS Stock Can Handle the Load
Source: Sundry Photography / Shutterstock.com

For the March quarter, UPS had net income of $935 million, $1.11 per share diluted, on revenue of $18 billion.  That was higher than its quarterly dividend payout of $1.01 per share. The company also announced free cash flow of $1.6 billion, also enough to clear the dividend’s cost.

Analysts whined about the revenue mix, which was higher for residential than commercial deliveries, and terrible for international. But UPS opened for trading May 8 at about $93, and that dividend yield is about 4.3%.

Income Investors Take Note

At a time when retired investors are reaching for yield in high-risk corporate bonds, the UPS dividend should be attractive. While common stock investors are always last in line for corporate obligations, behind bonds and all other bills, UPS proved this winter it can deliver results in all economic seasons.

This has not made it a stock for all investors. Those seeking capital gains will see its down 20% so far in 2020. Those seeking growth will see that March revenue was just 5% ahead of last year. Analysts are updating their models to reflect UPS’ slow, steady and profitable growth.

UPS isn’t coming away from the pandemic unscathed. Home deliveries are less profitable than bulk deliveries to business. First-quarter profit was down from a year earlier, even while revenue grew.

UPS is also finding new ways to compete with Amazon.com (NASDAQ:AMZN). Its network of UPS Stores means it has a physical presence that can even take Amazon returns. This will expand through an agreement to take packages from The Michaels Companies (NASDAQ:MIK) chain of crafts stores, when retailing reopens.

While longtime rival FedEx (NYSE:FDX) has gotten itself into trouble by picking fights with Amazon, UPS learned to adapt. I have speculated it’s because FedEx is still led by founder Fred Smith, while UPS has recharged its management with outsiders from Home Depot (NYSE:HD), PepsiCo (NYSE:PEP) and Walmart (NYSE:WMT). For them, Amazon is less an existential threat than a part of the business environment.

A Trump Bump?

UPS may also benefit from Trump’s insistence that the U.S. Postal Service stop “subsidizing” Amazon and raise rates. Such a move would bring UPS more incremental business, cash with which to expand its own delivery network.

During the current quarter, UPS drivers are hitting the road more, but making less for the company. That should change as stores and factories re-open over the next few months. UPS has also proven it can make money in a tough environment so that, if the lockdowns return, it is ready.

Competition with Amazon also steeled UPS in the use of new technology. It is now delivering prescriptions to some senior centers using drones, in conjunction with CVS Health (NYSE:CVS). The pandemic is giving UPS the cash flow to move ahead in areas that had previously been theoretical.

The Bottom Line for UPS Stock

UPS stock is not for everyone.

In today’s market it’s the equivalent of an old-line industrial. It’s a slow growth company with a steady stream of income.

That means if you’re looking for capital gains, look elsewhere. UPS’ share price should recover as the pandemic retreats, but it will never be a high-flyer. It will continue to ride low to the ground.

But at a time when high-flyers are out of fashion, with conservative investors doing triage on their portfolios against the virus’ siege, UPS stands out at its current price. It will still pay you to own it, and that’s saying something.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CVS and AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/ups-stock-can-handle-the-load/.

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