United Parcel Service (UPS 0.95%) and FedEx (FDX 2.13%) are the two titans of the package delivery industry. But despite having similar revenue, UPS' market capitalization is over three-and-a-half times larger than FedEx's. UPS continues to be better at converting revenue into profit.
Here's why UPS is a better-run business than FedEx, and, ultimately, a better stock worth owning over the long term.
Image source: Getty Images.
Meeting shareholder expectations
In late September, FedEx stock suffered the biggest single-day crash in company history after reporting worse-than-expected results and slashing its full-year earnings guidance, just one quarter after positive rhetoric and upbeat guidance. For all of fiscal 2023, FedEx is now on track to earn half the diluted earnings per share (EPS) that it guided for previously.
UPS reported its third-quarter 2022 earnings on Oct. 25. In stark contrast to FedEx, it reaffirmed all three of its full-year targets -- which were $102 billion in revenue, a 13.7% operating margin, and a return on invested capital (ROIC) above 30%. UPS deserves credit for not only producing accurate guidance but also generating excellent results during a challenging time.
NYSE: UPS
Key Data Points
A better business
Operating margin is simply the operating income divided by net sales. It's a useful metric to gauge the profitability of a business and its ability to limit expenses and convert more revenue into operating income. UPS' operating margin of 13.7% isn't just impressive because it's what the company guided for earlier this year. It's impressive because it would mark a 10-year high.
UPS Operating Margin (TTM) data by YCharts
ROIC is important too. It showcases a company's ability to generate profit and allocate capital effectively without relying too heavily on debt or equity. Again, UPS not only has a far higher ROIC than FedEx, but its ROIC is also near a 10-year high.
A higher-quality dividend
For all of 2022, UPS plans to spend around $5 billion on dividends and at least $3 billion on share repurchases. In the first three quarters, UPS generated $8.5 billion in free cash flow (FCF), indicating it can more than afford its dividend and share buyback programs. This achievement is all the more impressive considering UPS is paying $1.52 per share in quarterly dividends, compared to just $1.02 last year. UPS stock has a dividend yield of 3.7%.
Meanwhile, FedEx is paying $1.15 per share in quarterly dividends but only earned $1.23 in FCF per share last quarter -- leaving little wiggle room when it comes to buybacks or paying down debt. And given FedEx's shaky forecast, it's uncertain whether the company will be able to support future dividend raises.
FedEx deserves credit for raising its quarterly dividend from $0.75 per share to $1.15 per share earlier this year. But given its relatively weaker margins and FCF support, the dividend is simply not as high-quality as UPS' payout. Not to mention, FedEx stock has a lower dividend yield at 2.9%.
The better buy now
The objective of long-term investing is to find excellent companies that will deliver consistent results and meet investor expectations. For UPS and FedEx, that means steadily growing revenue, earnings, FCF, and dividends over time. UPS has a superior management team to FedEx, has a higher operating margin, and has allocated capital more effectively than FedEx.
UPS has done a better job forecasting and combating inflation than FedEx. And it is a better source of passive income than FedEx. Finally, UPS has a price-to-earnings ratio of just 12.9, which is only slightly higher than 11.4 for FedEx. Add it all up, and UPS is by far a better all-around company and a better investment than FedEx.
