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Will UPS Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether United Parcel Service (NYSE: UPS  ) makes a great retirement-oriented stock.

UPS doesn't make anything, but as the leading shipping and logistics company, it counts on other businesses and individuals sending their products around the world. Given its status as a barometer of overall economic activity, how has UPS handled the rocky conditions we've seen lately around the world? Below, we'll revisit how UPS does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at UPS.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$79.5 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.89

Pass

 

Worst loss in past five years no greater than 20%

(19.7%)

Pass

Valuation

Normalized P/E < 18

135.01

Fail

Dividends

Current yield > 2%

3.0%

Pass

 

5-year dividend growth > 10%

6.3%

Fail

 

Streak of dividend increases >= 10 years

4 years

Fail

 

Payout ratio < 75%

263.9%

Fail

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at UPS last year, the company has lost a point, as the company's payout ratio went through the roof as a result of falling earnings. The stock hasn't done that badly, but it's only managed to gain about 5% over the past year.

UPS's earnings are a bit misleading because of the impact of a huge $3 billion charge that it took in connection to its pension obligations. When you exclude that impact, concerns about its ability to finance its dividend pretty much disappear. With strength from shipping partners Amazon.com and eBay, UPS has enjoyed the corresponding boost in consumer shipping volume.

Nevertheless, UPS is far from being in the clear. Just yesterday, rival FedEx (NYSE: FDX  ) saw its shares take a 7% hit as the delivery giant said it would reduce its flight schedule to and from Asia. With customers looking to economize on shipping, FedEx has had to focus on cutting its own costs, and UPS will need to counter with its own cost-saving moves in order to keep its competitive edge.

Moreover, UPS took a big hit when its planned acquisition of Europe's TNT Express fell through. With concerns over the anti-competitive impact of the merger on rivals like FedEx, the European Commission blocked the merger, forcing UPS to give up its aspirations for a move it said what have been "transformative for the logistics industry." UPS also had to pay a termination fee of $267 million.

For retirees and other conservative investors, UPS's temporarily low earnings aren't expected to last, and if the company can return to its usual level of profitability, it should look more promising as a retirement-portfolio candidate in the future. Still, given its exposure to the global economy, you should only consider UPS if you're comfortable that the recent global slowdown is only part of the normal business cycle.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

For UPS and FedEx, Amazon has helped drive shipment growth for a long time. Yet does that make Amazon the better stock to buy? Rely on The Motley Fool's new premium report to tell you what's driving the online retailer's growth and to fill you in on reasons to buy and reasons to sell Amazon. The report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.

Add UPS to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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