2022 has been a tough year in the stock market. From steep declines to epic rallies to more steep declines, the volatility can leave investors woozy, confused, and uncertain about the future or which stocks offer the best opportunities. And while no one knows what will happen in the market over the short term, there are ways you can get your bearings and ensure your portfolio is built to perform long term. It starts with getting back to the basics of what long-term investing is all about.
At its core, the objective of long-term investing is to find quality, well-run businesses and buy their stocks for a reasonable price that can grow over time and help you reach your financial goals. United Parcel Service (UPS 0.34%) stands out as a great example. It's an excellent stock that is particularly attractive for investors looking for a reliable source of passive income from an industry leader.
Let's look at the case for buying this dividend stock and holding it for years to come.
Image source: Getty Images.
The importance of a well-run business
We all know UPS for its residential delivery business. But much of the company's recent growth can be attributed to having large-scale business-to-business volumes, partnering with small and medium-sized businesses (SMBs), growing its healthcare division, boosting international volumes and profits, and expanding its supply chain solutions segment.
UPS did an excellent job of building out its routes, tools, and resources for customers, which justified price increases. All told, the company grew its operating income at a faster rate than revenue, which indicates it is managing expenses well.
UPS Revenue (TTM) data by YCharts
When 2022 is all said and done, UPS is on track to book its best financial year in company history. And it's doing so while outlaying less in capital expenditures than in years past.
A foundation built on financial health
UPS is a well-run business, in part, because of its rock-solid balance sheet. Its debt-to-capital ratio and financial debt-to-equity ratio both indicate the company's capital structure isn't heavily dependent on debt, which is particularly important in a rising interest rate environment. UPS also did an excellent job reducing its net total long-term debt by over 57% in the past five years.
UPS Debt To Capital (Quarterly) data by YCharts
Net long-term debt went from an all-time high down to levels not seen since around 2015. What makes this debt reduction all the more impressive is that UPS is a much larger business today than it was in 2015. Growing sales and earnings without relying on debt indicates a stable business.
A common counterargument against investing in UPS is that it is a cyclical business whose earnings and margins will compress in an economic downturn. And while that may be true, the company deserves credit for preparing its balance sheet in case of a prolonged downturn. UPS can't control the economic cycle, but it can conduct its business in a way that capitalizes on growth while protecting against downside risk. Put another way, if there were ever a time for its business to take a hit, now would be as good as any.
Driving shareholder value
UPS' booming business coincided with dividend raises and share buybacks. Over the past 10 years, UPS raised its dividend every single year.
UPS Dividend data by YCharts
The dividend is now $1.52 per share per quarter compared with $0.57 per share per quarter a decade ago. What's more, the company's outstanding share count has fallen by over 9% over the past 10 years. Repurchasing stock is a sign that management is optimistic about UPS' prospects. Buybacks also boost earnings per share by lowering the outstanding share count.
UPS generates plenty of free cash flow to support dividend raises and buybacks. However, investors shouldn't count on sizable dividend raises anytime soon, given that UPS just raised its dividend by 49% earlier this year (shown as the big purple spike in the chart above). UPS stock has a dividend yield of 3.7%, which is roughly the same yield as the three-month Treasury bill. But unlike a Treasury bill, UPS stock provides potential upside (and downside) of the equity market, too.
UPS is the complete package
Bear markets have historically been excellent buying opportunities. But that doesn't mean that all stocks will recover.
UPS is a prime example of an industry-leading company with a wide moat. The package delivery and logistics industry is capital-intensive and has wide barriers to entry. Few companies can do what UPS does. And arguably, none of its peers operate with the same level of operational prowess or financial discipline.
Add it all up, and UPS is a dividend stock that can prove to be a foundational piece of a diversified portfolio.
