10 Large Caps to Rule Them All

After sifting through countless small caps and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can b e found with small caps, but their businesses are often well established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don’t have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.

For reference, here are the previous eight choices:

This week we're going to turn to the transportation sector and a company that continues to literally deliver on its promises -- FedEx (NYSE: FDX  ) .

What it does
FedEx makes cookies. OK, I was just seeing if you're paying attention. Along with United Parcel Service (NYSE: UPS  ) , FedEx provides transportation, e-commerce, and business services in the United States and internationally.

How it stacks up
There really is no comparison between FedEx and the highly dysfunctional United States Postal Service. Although both offer essentially similar services, the corporate image of reliability and the ability to deliver profitable results lies with FedEx. Therefore, the only real competition FedEx faces is from UPS and privately held DHL International. Since DHL is under no obligation to report its results to the public (and since we can't invest in it), the debate essentially comes down to FedEx versus UPS. I'm going to show you why FedEx is the better buy.

The first attraction investors will often have to UPS is its delectable dividend. Currently yielding 3.3%, UPS has grown its dividend with consistency since 2000. But another aspect of this dividend that investors should take note of is UPS's payout ratio, which currently sits at 49%. It's great that UPS is returning so much of its profits to shareholders, but doing so also ties the company's hands in relation to purchasing new equipment and increasing the size of its distribution network. Not to mention that the magnitude of future dividend increases is shrinking as its payout ratio moves higher.

FedEx has a yield of only 0.8%, but its payout ratio of 10% allows it the possibility to reinvest in its distribution network -- whether it's through equipment, technology, or more personnel -- while also giving it the potential for future dividend increases.

It may also surprise you that, from a financial perspective, FedEx makes for a far better value than UPS in almost every metric. Take a look for yourself.

Company: FedEx UPS
Price/Book: 1.4 7.6
Forward P/E: 9.2 13.3
Price/Cash Flow: 5.3 15.5
Gross Margin: 69.3% 77.3%
Annual Revenue Growth (Past Decade): 7.2% 5.3%
Dividend Yield: 0.8% 3.3%

Source: Morningstar (as of 10/4/2011).

It's astounding how much of a premium UPS commands in relation to FedEx even though FedEx has grown consistently faster than UPS over the past decade. Is 800 basis points' worth of gross margin worth paying 3 times more for cash flow and more than 4 times more in book value? I don't think so.

How it could make you money
Clearly, one of the ways FedEx could put money back in your pocket is by continuing to do what it does best -- slowly chip away at the foundation of the U.S. Postal Service. As losses worsen for the USPS, it will have no options other than to close some of its locations, which will open the door for FedEx to gain customers.

Another thing to consider is FedEx's unique ability to control pricing. If trucking giant JB Hunt Transport Services (Nasdaq: JBHT  ) , air and ocean freight logistics company UTi Worldwide (Nasdaq: UTIW  ) , or light-freight transporter Pacer International (Nasdaq: PACR  ) attempted to change their pricing all of a sudden, they'd probably find a wall of resistance. Unlike these industries, FedEx's large barrier to entry provides a pricing model that isn't "sticky," and it can adjust its prices higher on an as-needed basis. Therefore, there's little worry that its margins will sink much lower than they currently are -- ensuring healthy profits moving forward. It's for that reason that even with a global slowdown on the horizon, FedEx deserves its spot among the 10 large caps to rule them all.

What's your take on FedEx? Share your thoughts in the comments section below, and consider adding FedEx to your free and personalized watchlist to keep up on the company's latest breaking news.

The Motley Fool owns shares of Teva Pharmaceutical, Apple, Starbucks, FedEx, United Parcel Service, and Bank of America. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, Teva Pharmaceutical, WellPoint, FedEx, Starbucks, and Chevron, as well as creating a bull call spread in Apple.

Fool contributor Sean Williams owns shares of Bank of America but has no material interest in any other companies mentioned in this article. He realizes FedEx overnight has saved his rear end on more than one occasion. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 07, 2011, at 9:15 AM, leechild26 wrote:

    Very weak argument, the reason UPS pays out more in dividends is that it can and still invest in CapEx. UPS has an operating margin of 13.4% vs. FedEx 8% so it makes more money on each dollar. UPS has also opened 2 new air hubs in China and expanded it's World Port hub in the US. UPS air fleet averages 14 years while FedEx is 24 years. The reason FedEx does not pay out a dividend it that they need the money to upgrade that fleet. That's not growing capacity, that's catching up. Also, in regards to the USPS, the slowdown that they are experiencing is hurting FedEx more that it will help them. Keep in mind that FedEx has a dedicated sort to move USPS volume. Any drop in this volume impacts FedEx bottom line. FedEx is a good company, I'm just pointing out some flaws in your argument.

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