Why United Parcel Service's Stock Is Worth Owning

The next selection for the newly launched Inflation-Protected Income Growth Portfolio is shipping magnate United Parcel Service (NYSE: UPS  ) . Well known for its iconic brown trucks and its catchy "We love logistics" commercials, UPS delivers for Amazon.com and many other online retailers.

The company has paid a stable or rising dividend every year since 2001. If you ignore the one-time dividend around the time of its 1999 IPO (that got paid in 2000), its dividend has been stable or upward-moving the entire time the company has been publicly traded.

Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.

Dividends:

  • Payment: The company's annual dividend currently sits at $2.28 a share, a yield of nearly 3.1% based on Wednesday's closing price.
  • Growth history: The company has paid stable or higher dividends every year since 2001. While that's a bit light on the growth front, it's not bad for a company that first became available to public shareholders in 1999.
  • Reason to believe the growth can continue: With a payout ratio of 64%, the company retains better than a third of its income to reinvest for future growth. Additionally, since the company's cash flow statement indicates that its earnings are covered by cold, hard cash, there's little risk that a near-term cash crunch will derail those plans.

Balance sheet and valuation:

  • Balance sheet: A debt-to-equity ratio of 2.0 indicates that the company does use debt, but reasonably, and it hasn't overleveraged itself to the point where a near-term financial hiccup would derail it.
  • Valuation: By a discounted cash flow analysis, the company looks to be worth around $74.9 billion, making its recent market price of $70.8 billion look reasonable. Of course, there's some risk involved. In an economic slowdown, for instance, there will likely be less demand to ship stuff around, reducing the need for UPS' services.

Diversification fit:
The previous picks for the portfolio included:

...making this shipping company a reasonable fit.

What are the risks?
As the company's primary operation is moving stuff around, it's also very much exposed to the price of fuel -- the more gas and diesel cost, the more UPS' margins are squeezed. UPS also fights a tooth-and-nail battle with FedEx  (NYSE: FDX  ) to win package delivery business, and as long as the United States Postal Service delivers packages, they're in the competitive mix as well.

And while UPS is well known in the U.S., it's also up against some pretty stiff global competition in the other countries where it operates. DHL (Deutsche Post) is an incredibly formidable German competitor, for instance, and many national post offices don't look very favorably on other companies taking away profitable deliveries.

Also, shipping is generally a leading economic indicator -- as it goes, so often goes the overall economy, and economic weakness may show up in the shippers before it appears elsewhere. Still, full-service logistics firms like J.B. Hunt (NASDAQ: JBHT  ) and freight brokers like C.H. Robinson Worldwide (NASDAQ: CHRW  ) may feel a slowdown sooner, since they're more exposed to upstream shipping volumes.

What comes next?
When the Fool's disclosure policy allows, I plan to buy UPS stock for the Inflation-Protected Income Growth portfolio, as long as its share price remains below $76. I expect to invest around $1,500 in the selection, giving it a 5% allocation in the portfolio, with 55% of the portfolio still remaining cash. Watch my article feed for details of the next pick, coming soon.

Also, to score the performance of this pick, I'm making an outperform CAPScall on the stock at Motley Fool CAPS, putting my All-Star ranking on the line along with the plan to invest cold, hard cash.

More expert advice from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2170157, ~/Articles/ArticleHandler.aspx, 9/19/2014 6:08:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,279.74 13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASD 4,579.79 -13.64 -0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/19/2014 4:00 PM
UPS $99.44 Down -0.19 -0.19%
United Parcel Serv… CAPS Rating: ****
CHRW $67.82 Down -0.41 -0.60%
C.H. Robinson Worl… CAPS Rating: *****
FDX $158.33 Down -0.60 -0.38%
FedEx CAPS Rating: ****
JBHT $74.42 Up +0.47 +0.64%
J.B. Hunt Transpor… CAPS Rating: ***

Advertisement