Please ensure Javascript is enabled for purposes of website accessibility

Why UPS is a Dividend Investor’s Dream

By Daniel Foelber – Jun 13, 2020 at 9:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company's dividend has increased fivefold over the last 20 years.

United Parcel Service (UPS -0.57%) operates a global network of transportation services for businesses and consumers.

While you're probably familiar with UPS in some capacity, you might be unfamiliar with UPS as a stock. Here's why UPS is a dividend investor's dream.

Strong (if not consistent) dividend growth

Although not a Dividend Aristocrat, there are many reasons why UPS is one of the best dividend stocks in the industrial sector.

In the year 2000, UPS was paying a $0.17 per share quarterly dividend, or $0.68 per share annually. In 2019, UPS paid $0.96 per share quarterly, or $3.84 per share for the year, representing a more than 500% dividend raise in 20 years.

A business owner prepares deliveries for clients.

Image Source: Getty Images.

During that stretch, UPS never cut its dividend, and there were only two years where it didn't raise it. Add it all up, and you have $40.60 of low-tax dividend payments per share over that time, and that doesn't even include the appreciation of the company's stock price.

UPS yields 3.6% at the time of this writing, nearly double the average yield in the S&P 500 index. 

Some headwinds to account for

UPS's dividend continues to grow and sports a high yield, but the company isn't without its risks. For starters, UPS's debt-to-equity and debt-to-capital ratio -- two key financial metrics -- have been climbing as the company continues to take on debt to grow its e-commerce and healthcare businesses.

UPS Debt to Equity Ratio (Annual) Chart

UPS Debt to Equity Ratio (Annual) data by YCharts

The downside of UPS using a significant portion of its free cash flow to pay dividends is that it leaves the company with less retained earnings, meaning it finds itself continuously turning to debt in an effort to grow its business. Yet not all debt is bad. If you're a believer that UPS is using debt to expand its growth potential so that its services and fleet can meet the needs of businesses and consumers that are increasingly relying on shipping, then the investment is arguably justified. However, making sure that UPS's debt doesn't get out of hand from overinvestment is something to watch.

Unfortunately, the COVID-19 pandemic has led to a fall in business-to-business (B2B) volume but a rise in business-to-consumer (B2C) volume as business slows but more time at home has led to more consumer volume. While this may sound like a fair trade-off, it's not. B2C growth can mean higher revenue, but it can also lower margins due to higher delivery costs. 

As a result of the uncertainty, UPS suspended its share buyback program, reduced 2020 capital expenditures by $1 billion, and withdrew its 2020 guidance. 

Some tailwinds, too

The good news is that the economy has been recovering faster than expected as people go back to work, businesses large and small open back up, and life returns somewhat to normal. UPS noted that as China began to recover in March, "Asia outbound business accelerated both air freight and small package, including the healthcare, high-tech and e-commerce sectors." Hopefully, a recovery in Europe and the US would follow a similar trajectory.

In the meantime, UPS's healthcare investment seems to have paid off as UPS Premier, the company's critical healthcare shipment service, has been answering the needs of the healthcare industry in response to the pandemic. In this way, UPS is on the frontlines of supporting medical professionals with time-sensitive shipments. 

A quality income stock

Like other industrial stocks, UPS's business tends to ebb and flow with the broader economy, so there's an inherent risk that if the economy slows, so will UPS. That being said, the company's investments in e-commerce and healthcare have already given the company a distinct advantage over its competitors.

UPS isn't immune to risk, but the company has proven itself to be a leader in the transportation space. Throw in a high-quality and high-yielding dividend that should continue to grow, and you have a well-balanced company with the potential to reward investors for years to come.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

United Parcel Service Stock Quote
United Parcel Service
$167.93 (-0.57%) $0.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.