Sometimes, the best market-beating businesses aren't flashy paradigm-shifting growth companies. Instead, they are easy-to-understand businesses that are really good at what they do. Take United Parcel Service (UPS 0.15%) for example.
UPS thrived during the height of the pandemic as more people ordered packages to their doors instead of shopping in person. It sustained that momentum in 2021 as economies reopened around the world, leaning into demand for package deliveries in the healthcare industry and fueling the ongoing growth of e-commerce. Here are three reasons why UPS continues to do well and why its stock is a great buy even at its all-time high.
1. UPS continues to deliver record numbers
At the time, 2020 was UPS' best year in its history. And the last three months of the year were its best-ever quarter as it thrived during the holiday season. UPS also addressed the need to deliver COVID-19 vaccines, capping 2021 by delivering a total of 1.1 billion doses.
Established companies tend to have a tough time following record performances. Just look at Clorox's struggles in lapping its pandemic-induced record year. However, UPS rose to the challenge by growing revenue by 11.5% in 2021 compared to 2020. It posted free cash flow (FCF) of $10.9 billion, more than double what it earned in 2020, booking a full-year operating margin of 13.2% (its highest in 15 years), and making $12.13 in diluted earnings per share (EPS), a 47% year-over-year increase.
The numbers speak for themselves. But what really stands out is that UPS did this in an environment where it was so easy to blame the ongoing pandemic, supply chain challenges, a labor shortage, inflation, or rising interest rates for lower-than-expected results. UPS didn't shy away from these challenges, and certainly called out the weight of these pressures on its results during its Q4 2021 conference call. But at the end of the day, it delivered by topping one record year with another.
2. UPS has pricing power in an inflationary environment
A report published by the Bureau of Labor Statistics shows that the consumer price index (CPI) rose 6.8% from November 2020 to November 2021, the largest increase since the 12-month period ending June 30, 1982. During periods of high inflation, businesses will incur unforeseen costs that they either have to absorb or pass along to their customers. Some industries, like oil and gas, are among the primary drivers of high inflation. As demand outpaces supply, oil and gas prices rise, and consumers have little choice but to accept higher prices. Other companies are in price-taking industries; they might lack an edge in a highly competitive space, unable to offset the toll of higher inflation.
UPS is the leader in a capital-intensive industry with a limited number of competitors. This gives it the power to increase prices with little to no impact on demand. During its Q3 2021 earnings call, UPS announced a 5.9% general U.S. rate increase for 2022 to offset higher costs. Similarly, its largest competitor, FedEx, announced a 5.9% increase in shipping rates for FedEx Express, FedEx Ground, and FedEx Home Delivery, which went into effect Jan. 3, 2022. In December 2021, the U.S. Postal Service announced a 3.1% rate increase for most Priority Mail and Priority Mail Express services. Given that the entire industry is raising prices, customers have little choice but to accept higher costs.
3. UPS remains an inexpensive stock
UPS' business is at the top of its game and should continue to thrive despite the challenging business climate. The cherry on top is a low valuation for its stock. Even though UPS stock reached its new all-time high on Tuesday, it still closed the week with a price-to-earnings (P/E) ratio of just 18.5. Additionally, UPS fulfilled its promise to pay half of its adjusted EPS to shareholders through a dividend. It earned $12.13 in adjusted EPS in 2021, and just raised its 2022 dividend to $1.52 per share per quarter, or $6.08 per share per year, for a yield of 2.6%.
The complete package
Given the strength of its underlying business, ability to combat inflation, attractive valuation, and healthy yield, UPS is a well-rounded business that is also an inexpensive dividend stock. UPS also set relatively attainable expectations for 2022, forecasting revenue growth of just 4.8% and FCF of $9 billion, which is lower than 2021's $10.8 billion. Given its strong position heading into 2022, UPS has plenty of room to beat expectations.