Sometimes you have to take a step back to prepare for two -- or even three -- steps forward. That appears to be the thinking of the management of United Parcel Service
From now on, the company will be somewhat less concerned with maintaining a rock-bottom debt level and cultivating top-of-the-line credit ratings in favor of greater balance-sheet flexibility and perhaps an increased ability to reward its shareholders. In the process, it'll hike the funds available for stock repurchases from $2 billion to $10 billion, indicating that, based on present prices, it'll buy back about one-seventh of its outstanding shares during the next couple of years.
As for the one-step back part: All this has caused indigestion at Standard & Poor's, such that the ratings agency has jerked UPS' platinum "AAA" imprimatur by three levels. According to S&P, "Debt leverage will more than double following the implementation of the new financial policy."
But, so what? That increased leverage likely will benefit both current and future shareholders through the expanded buyback and the company's increased ability to invest in new opportunities. Having the highest credit rating isn't worth the paper it's printed on if it hinders participation in attractive ventures.
The change at UPS is the first significant event of the new regime of Scott Davis, the company's former CFO and now its chairman and CEO. During the past quarter, UPS also inked a huge new Teamsters contract covering nearly 240,000 drivers and other workers. It's likely that the increased visibility from that contract had a role in management's more adventurous approach to balance-sheet management.
UPS, like FedEx
A couple of weeks ago, in assessing the challenges at both UPS, a Motley Fool Income Investor selection, and FedEx, a Stock Advisor pick, I suggested that Fools remain on the sidelines regarding both companies until a price pullback made getting involved more sensible. But given the major change in the landscape at UPS, I wouldn't question my Foolish friends were they to slowly nibble at a position in the company.
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