While looking for a stock that could double within five years may sound like a lofty aspiration, it may be more within reach than most people realize. Requiring a 15% annualized return for five years, an investment needs to slightly outperform the market's historical annualized total return of roughly 11% to 12% to accomplish this feat.
Additionally, by focusing on dividend growth stocks with well-funded dividends and a history of solid returns on invested capital, investors can further stack the odds of meeting this 15% threshold in their favor. United Parcel Service (UPS 0.14%) and Murphy USA (MUSA 0.19%) are two companies that fit this simple billing.
Trading at a discount to the S&P 500's valuations, here's why these two businesses look primed to outperform over the next five years and beyond.
Is a rebound en route for UPS?
With Amazon recently surpassing UPS and FedEx as the largest delivery business in the U.S., it may not seem like a great time to buy UPS. Worse yet for UPS, Amazon isn't just the company's biggest competitor now but is still its largest customer, accounting for 11% of its total revenue in 2022. While the two companies still work together, it is not unreasonable to imagine this partnership ending at some point -- just like FedEx did with Amazon in 2019.
So, with this bad news laid out -- what on Earth makes UPS an attractive dividend stock over the next five years? Three things:
1. The start of a rebound
Announcing a new five-year contract with its workers in August, UPS has begun reeling customers back in who had temporarily gone elsewhere due to the uncertainty stemming from the labor dispute. During the company's third-quarter earnings, CFO Brian Newman explained that from August 2022 to October 2022, daily shipments increased by 1.5 million.
However, this figure has jumped to 2.7 million over the same time this year, highlighting that UPS is rebounding off of its lows in August -- despite an awful macroeconomic environment. Should this 90-day increase extend throughout the year, it would account for roughly 5% sales growth.
2. Leveraging its massive network for future growth
Building upon its entrenched position within the industry, UPS is now focusing on specialized (and more profitable) niches such as time-sensitive and temperature-controlled healthcare shipping. Recently acquiring MNX Global Logistics in 2023 and Bomi Group in 2022, the company now expects its healthcare vertical to account for more than 10% of sales by the end of the year.
These acquisitions not only strengthen UPS's healthcare ambitions, but support its international growth story, providing footholds in Latin America, Europe, and Asia. Pair these acquisitions with a joint venture focused on India's $5 trillion economy, and investors should expect to see international unit quickly grow to account for more than its current 20% of UPS's sales.
3. A top-tier return on invested capital
UPS currently has a return on invested capital (ROIC) of 21%, which places it in the top quintile among its S&P 500 peers. This is important for investors as stocks with an ROIC in the top 20 percentile tend to outperform their lower-ranked competitors. Measuring a company's profitability compared to its debt and equity, UPS' high mark is promising as it highlights its ability to generate outsize profits despite the heavy capital expenditures needed to maintain its network.
And the icing on the cake for investors? The stock's valuation remains near 10-year lows while its dividend yield is near 10-year highs.
UPS PE Ratio data by YCharts
Aiming for 15% annualized growth over the next five years to reach the goal of doubling your money, UPS' hefty yet well-funded 4.2% dividend yield significantly improves your odds. Raising its dividend every year since the Great Recession, UPS looks like an ideal candidate to double your money in five years as it continues to rebound, operationally and valuation-wise, from this once-in-a-decade low.
Murphy USA: Obliterating the market's returns, but few are noticing
Delivering a total return of over 800% since its spinoff from Murphy Oil in 2013, convenience store chain Murphy USA has been one of the most successful stocks of the last decade, yet few investors may recognize the company. Home to over 1,700 stores -- the vast majority of which are located close to a Walmart thanks to a past partnership -- Murphy USA is now the fourth-largest convenience chain in the U.S. by store count.
This massive network begets advantageous fuel-sourcing agreements for the company, letting it pass along lower gas prices to its customers. Thanks to this top-tier cost structure advantage, Murphy's cost per gallon is typically $0.05 to $0.10 lower than its peers in the bottom half of the National Association of Convenience Stores. These price savings attract value-focused customers and open up the opportunity for merchandise sales.
With 60% of the gas stations in the U.S. run by single-store operators who cannot compete against Murphy USA's pricing, this significant cost advantage should not dwindle anytime soon. Additionally, the fragmentation of the convenience store industry makes it ripe for consolidation, providing the company with an incredibly long potential growth runway via mergers and acquisitions should it continue to go down that path. Acquiring QuickChek and its 157 stores in 2021, Murphy expanded into the Northeast while adding new food and beverage and electric vehicle charging capabilities.
Currently owning an impressive 21% ROIC, Murphy USA generates boatloads of net income and free cash flow -- the vast majority of which it immediately returns to shareholders through share buybacks and dividends.
MUSA Free Cash Flow data by YCharts
Thanks to these buybacks -- which have lowered the company's outstanding shares by 54% since 2013 -- and a new dividend that has been raised for seven consecutive quarters, Murphy USA looks like a solid buy at just 15 times earnings.
