United Parcel Service (UPS -1.06%) stock quietly reached its new all-time on Tuesday last week after the company's fourth-quarter and full-year 2021 numbers trounced analyst estimates. Meanwhile, Shopify (SHOP 0.28%) stock is hovering around its 52-week low as growth stocks come under pressure due to valuation concerns, inflationary pressures, and fears of slowing growth.
Income investors looking for an e-commerce play could be better suited with a position in UPS. Here's what makes the dividend stock a great buy even at its all-time high.
A great business at a premium price
Shopify stock has spent years crushing the market due to incredible sales growth and its emergence as an industry-leading e-commerce company. The COVID-19 pandemic threw fuel on its already red-hot growth rate as merchants took their goods and services businesses online. As a result, Shopify finished 2020 with over 1.7 million businesses, which is over 10 times the number it had in 2015. In 2021, Shopify continued to grow sales at a torrid rate even as its performance lapped its record 2020 year. Its full-year results aren't out yet, but analyst estimates call for revenue growth of 56% compared to 2020.
The concern is that Shopify's growth rate is slowing. Starting this year, Shiopy's year-over-year revenue growth rate could fall to the low 30% range and then stay there for the foreseeable future. If that happens, its valuation will quickly begin to look too expensive. Pair slowing growth with increased competition and a hazy reading on the company's earnings and free cash flow trajectory, and you have a stock that could face further downward pressure as Wall Street wastes no time revaluating high-flying growth stocks.
Shopify is a phenomenal business with real competitive advantages in its industry. It could very well end up being a long-term market outperforming stock, even at its current price. However, Shopify stock's run-up to its all-time high of over $1,750 per share was likely premature and presents a bad reference point for what Shopify should be worth. Even after the sell-off, Shopify is valued at $110 billion. To justify that valuation, Shopify has to grow sales a lot faster than 30%, or prove it can consistently convert a higher portion of sales to earnings and FCF.
UPS' timely e-commerce investments
By comparison, UPS offers a better mix of growth at a reasonable price and a dividend to boot.
Along with the rest of the package delivery industry, UPS' e-commerce business accelerated during the pandemic as shoppers took their business online. However, UPS forecast a multiyear runway in global e-commerce and began laying the groundwork to grow its services and expanded shipping routes to accommodate higher demand before the onset of the pandemic -- putting UPS in the catbird seat to take advantage of higher demand during the pandemic.
In October 2019, UPS launched its Digital Access Program (DAP). At its core, DAP gives small and medium-sized business (SMBs) order management, fulfillment, delivery services, and logistics tools previously reserved for larger companies. UPS finished 2020 with 700,000 DAP accounts and set a goal to finish 2021 with $1 billion in DAP revenue. It finished 2021 with $1.3 billion in DAP revenue and expects 2022 DAP revenue to top $2 billion.
UPS' strategy to cater to high-margin SMB customers is working. It grew SMB daily volume by 18% in 2021. SMBs made up 27% of total U.S. volume, and UPS reaffirmed its target for SMBs to make up over 30% of U.S. volume by 2023.
UPS is growing its higher-margin segments
UPS' "better, not bigger" framework is centered around improving the quality of its earnings. UPS has done that by growing DAP and its SMB volumes, as well as by growing its healthcare business and improving its website. Healthcare made up $8 billion of UPS' $97.3 billion in total 2021 revenue, which should allow the company to easily hit its target of $10 billion in 2023 healthcare revenue.
Transactions on UPS' website made up just under 10% of 2021 revenue as UPS looks for ways to improve accessibility.
Strength in e-commerce and healthcare, paired with a rebound in business-to-business revenue, helped improve UPS' operating margin. UPS tends to make more profit from these services than it does from high-volume, low-margin residential deliveries. It finished 2021 with a 13.2% operating margin, its highest full-year operating margin in 15 years.
UPS is the complete package
An investment in UPS stock is unique because it offers a blend of growth, value, and income. UPS' business has plenty of room to run as the company automates existing functions and expands routes both domestically and internationally. UPS is also an inexpensive stock, with a price-to-earnings (P/E) ratio of just 19.1. And UPS is an excellent dividend stock, as management has stated its intent to distribute half of adjusted earnings per share to investors through the dividend. In 2000, UPS paid a $0.17 per-share quarterly dividend. Since then, it has never once cut its dividend and has gradually raised it by nearly ninefold. UPS just raised its dividend by 49% to $6.08 per share per year, representing an annual yield of 2.7%.
UPS offers investors a reliable passive income stream on top of a strong underlying business. Given its reasonable valuation, UPS is a much more attractive long-term investment than Shopify -- particularly for risk-averse investors or those that are trying to limit their exposure to market volatility.
