Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



FedEx Moves Aggressively to Return Cash to Shareholders

Since this past spring, I have highlighted the investment opportunity in FedEx (NYSE: FDX  ) here at The Motley Fool. The company is in the midst of a three-year restructuring process that will cut costs in its express business, leading to significant margin growth. Moreover, unlike many companies that restructure, FedEx is still growing revenue, especially in its ground business.

This combination of revenue growth and margin growth made FedEx a compelling investment opportunity back in the spring, especially as it was trading at just 16 times trailing earnings. On Tuesday, FedEx gave investors yet another reason to cheer: The company announced that it will return a significant amount of cash to shareholders through share repurchases.

Growing cash stockpile
While FedEx competes in a capital-intensive industry, it has historically generated plenty of cash to fund its growth without taking on a lot of debt. FedEx is investing $4 billion this year in order to replace older, fuel-guzzling aircraft and to lay a foundation for growth in its U.S. ground-shipping business.

FedEx is investing heavily for growth.

Despite these heavy investment plans, FedEx should generate plenty of cash in its operations to cover the costs. FedEx generated operating cash flow of $4.7 billion in its most recent fiscal year, and $4.8 billion the year before that.

With such strong cash flow, FedEx has been reliably growing its cash and investments stockpile for the past few years. In fact, the company's cash balance more than doubled from $2.3 billion to $4.9 billion between May 2011 and May 2013. Since FedEx generates cash so reliably, there's no reason the company needs to carry such a large cash reserve.

Time for a nice buyback
Evidently, FedEx's board of directors came to the same conclusion recently. On Tuesday, the company announced a new 32 million share repurchase program, which will be added to the 7.4 million shares left on the previous repurchase program. The increase in FedEx's share buyback program represents approximately 10% of its total share count (317 million shares).

By aggressively returning cash to shareholders through a major share repurchase, FedEx will augment its organic earnings growth over the next few years. Growth at FedEx Ground and margin improvements at FedEx Express have already created the groundwork for EPS to grow from $6.23 last year to around $10 by fiscal year 2016. Assuming that FedEx completes the new share repurchase program by then, it will boost EPS by another 10%.

Foolish conclusion
After rallying as high as $122.50 on Tuesday, FedEx shares are no longer the "slam-dunk" buy they were just a few months ago when the stock was stuck below $100. Still, FedEx is poised for strong earnings growth over the next few years, which will be accentuated by the new share repurchase program.

FedEx has a very realistic chance to grow EPS to $11 by fiscal year 2016, with plenty of room for growth thereafter (assuming a reasonably cooperative global economy). With such good prospects, FedEx may still be worth a look for long-term investors.

Turbo-charge your portfolio
FedEx may be a great stock for global growth, but we have plenty more for you.  Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. Now he wants to share it, along with a few of his favorite growth stock superstars, with you! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.

Read/Post Comments (0) | Recommend This Article (1)

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.

Compare Brokers

Fool Disclosure

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: 2683347, ~/Articles/ArticleHandler.aspx, 9/24/2016 8:35:23 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 23 hours ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

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

9/23/2016 4:04 PM
FDX $174.39 Up +0.73 +0.42%
FedEx CAPS Rating: ****