United Parcel Service (UPS 0.03%) came out of the pandemic delivering exceptional growth in both its dividend payout and earnings per share. The company's ubiquitous trucks remained on the roadways in force, and United Parcel Service continues to stay ahead of the market at large even during the turmoil of the 2022 bear conditions. With continual growth and 12 straight years of increasing dividends, UPS seems ready to also deliver passive income for those willing to invest in the company and hold for the long term.
Blue-chip strength from a blue-collar company
Many blue-chip stocks offer reliable services with more than a decade of proof under their belts, and UPS delivers on that expectation. Pandemic conditions led to shares slipping amid far weaker earnings than in previous years. Things turned around as the economy began to heat up, and this year saw record share prices near $220, with earnings per share of $12 or more from the delivery giant as confidence in UPS grew. Much of that confidence surrounds changes that followed the announcement of a new CEO, Carol Tomé, in 2020. The second quarter earnings call highlighted continued revenue increases since the leadership change along with the deployment of several new initiatives designed to tackle ongoing supply chain shortages and labor woes plaguing the market at large.
United Parcel Service dividend yields well exceed the average S&P 500 dividend yield of a meager 1.82% as of September. The UPS yield stands at 3.64% currently. The third-quarter earnings report comes out next week, which may give further insight into company performance that drives dividend payouts and what kind of growth in revenue and earnings the company may expect.
Continual dividend growth
United Parcel Service increased its dividend every year for the past 12 years, with this year seeing a quarterly increase around 49% in February for the March payout. That represents the largest increase in the company's history. This type of solid dividend delivery and growth offers exactly the type of passive income many investors seek from a long-term held asset.
The company also announced the continuation of its share buyback program, revising the repurchase amount upwards to a total of $3 billion for 2022. United Parcel Service has $11.7 billion cash or cash equivalents available as of June 2022. Stock buybacks often indicate a position of strength as companies demonstrate they do not require additional equity funding, and cash flows from company reports in the same period show $5.5 billion income.
The threat of an economic downturn
Delivery competitor FedEx Corporation (FDX -0.52%) may yet rain on UPS's parade, as it recently let slip an expectation of a potentially weak holiday season. Next week's earnings report from UPS may share similar news, as the economy continues to flirt with recession despite aggressive moves from the Federal Reserve. This could jeopardize future large dividend boosts from the United Parcel Service, though it seems unlikely to prevent small to moderate increases in annual dividend payouts.
"We expect there to be downward adjustments to volume forecasts," said Paul Melander, a FedEx Ground senior vice president, according to Reuters. Such a volume retraction could hit all delivery companies, but this weakness may not extend to all sectors, as UPS and FedEx logistics differ in many key areas. UPS derives much of its revenue from domestic shipping, accounting for approximately 75% of its shipping revenue. FedEx international (and foreign domestic) shipping makes up over half of the company's total package revenues. This could indicate the companies may see different effects from the global economy. Inclement weather, further economic retraction or global pandemic activity, and any blow to consumer spending could create the type of downturn that puts pressure on dividend growth and safety.
United Parcel Service's reliability shines through
When it comes to passive income, smart investors seek safety and growth alongside high yields. The percentage may not matter as much if the company doesn't issue dividends in a quarter or slow dividend growth fails to keep up with the market.
United Parcel Service has proven itself in previous decades, and its most recent year has delivered stellar returns and steady growth. That makes UPS the kind of stock savvy investors may choose to hold forever in anticipation of steady dividend returns.