In Q3, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) sold $7 billion worth of public equity holdings, including its entire stake in United Parcel Service (UPS 0.14%).
Let's look at how meaningful the sale was to Berkshire, its exposure to the transportation industry, and whether you should follow Berkshire's lead and sell the dividend stock too.
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An inconsequential decision
UPS has always been one of the most peculiar Berkshire holdings because of the position sizing.
In Q2, Berkshire held just 59,400 shares of UPS. At the time of the filing, the position was worth $10.6 million, just 0.03% of Berkshire's public equity portfolio and the smallest holding of 48 securities. UPS has long been a Buffett stock on a technicality rather than a meaningful position.
Berkshire's exposure to the transportation industry
In his 2020 annual letter to Berkshire shareholders, Buffett called Berkshire's 100% ownership of BNSF Railway one of the company's "Big Four" assets, along with its then 91% ownership (now 92% ownership) of Berkshire Hathaway Energy, its then-5.4% ownership of Apple, and most importantly, its property/casualty insurance business.
BNSF Railway made Berkshire $5.9 billion in profit last year. Slapping a conservative 15 multiple on the business would make it worth $88.5 billion. A 22 multiple would make it worth around as much as UPS, which has a market cap of $127.4 billion.
Berkshire has a lot of exposure to the transportation industry through BNSF -- not the package delivery industry per se, but certainly the transportation of goods and the vulnerabilities that come with an industry so closely tied to the ebbs and flows of the economy.
This exposure may partially explain why UPS may never amount to a meaningful position in Berkshire's portfolio. On top of that, Berkshire probably thought that other companies were a better deal than UPS. After all, UPS had a higher price-to-earnings ratio than Apple when Buffett began buying it in 2016. And in 2021 and 2022, Berkshire went on an oil and gas buying spree, namely through Chevron and Occidental Petroleum.
All told, it makes sense why Buffett and his team decided to seek other opportunities.
UPS stock is a well-rounded buy
UPS has been hit hard by slowing package delivery volume, paired with labor negotiations that resulted in $500 million in up-front expenses, among other costs.
The company is used to going through economic cycles. And it's worth noting that UPS is coming out of its biggest boom in company history, a boom that saw all-time high operating margins paired with a blistering top- and bottom-line growth rate.
Zoom out, and UPS has been doing well, with the stock up over 50% in the last five years, trailing-12-month revenue up 29.5%, and normalized diluted earnings per share up 38.1%. And that's even after this year's slowdown in the business.
UPS Revenue (TTM) data by YCharts
UPS continues to make major investments in expanding routes, improving its logistics, and increasing the efficiency of its operations through technology. It also gets a larger share of revenue from healthcare and small and medium-sized businesses than ever before, which is making its business more diversified and resilient to a downturn.
The company's ability to invest even during a downturn, while also turning a healthy profit, shows that UPS doesn't go through the epic booms and crushing busts of other cyclical stocks, but rather can benefit from an economic expansion while also putting up decent results during a contraction.
In addition to investing through a downturn, UPS also has the free cash flow and balance sheet capable of supporting its sizable dividend. UPS paid $4.08 per share in dividends in 2021 before implementing a whopping 49% raise in 2022 and then raising the dividend by another $0.10 per share per quarter in 2023 -- putting the quarterly dividend at $1.62 per share. The sizable raises places UPS in an elite category of high-quality, high-yield dividend stocks, as the stock currently yields 4.4%.
UPS made the dividend raises, largely as a result of its incredible performance during the worst of the pandemic. Investors shouldn't expect huge raises in the years to come. But even if UPS just maintains its dividend for a while, it still sports a yield around three times the S&P 500. UPS's dividend yield is also coincidently the same as the 10-year Treasury rate of 4.4%.
A passive-income powerhouse
UPS is a good choice for investors who want the passive income available from a risk-free asset like the 10-year Treasury but who are also comfortable with the risks and potential reward that comes from investing in the stock market.
UPS may be in for some near-term challenges. But the business has laid a foundation that is built to last. And its dividend provides a sizable incentive to hold the stock through periods of volatility.
