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What Makes United Parcel Service's Stock Worth Owning?

By Chuck Saletta – Mar 2, 2014 at 9:00AM

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The same things that made it worth buying in the first place: a reasonable valuation, an acceptable balance sheet, and a covered and growing dividend.

The real-money Inflation-Protected Income Growth portfolio owns shares of United Parcel Service (UPS -0.60%). UPS, like every company in that portfolio, earned its place because at the time it was purchased:

  • Its shares appeared to be reasonably priced.
  • Its balance sheet looked solid.
  • It had a covered dividend with a history of increases.
  • That dividend looked capable of continuing to rise.
  • The company fit reasonably well within the portfolio from a diversification perspective.

Still, just because a company fit a portfolio at one time doesn't mean it will fit forever. This article reviews the current state of several of the key factors that made UPS worth owning to determine whether it still has what it takes to retain its spot in the IPIG portfolio.

Based on a discounted cash flow analysis, UPS's business looks to be worth around $88.8 billion, which, conveniently, is really close to its recent market capitalization of $88.9 billion. While the company's market capitalization is a tad bit higher than where the IPIG portfolio would consider buying shares if it didn't already own some, there doesn't appear to be a compelling need to sell based on valuation.

After all, any fair value estimate is based on projections of an unknown future, and nobody has the ability to predict it exactly correctly. Still, it's an estimate based on publicly known data and expectations, and since the company's market price is right around that fair value estimate, there doesn't appear to be a compelling case to sell based on valuation.

Result: Hold, based on valuation.

Balance sheet
UPS has done an admirable job recovering its balance sheet strength. Its debt-to-equity ratio now sits around a more comfortable 1.7. That reasonable debt-to-equity ratio gives the company the flexibility to manage through hiccups like the one it had delivering last-minute Christmas gifts this past December. In addition, the company has more than $4.6 billion in cash on its balance sheet, which positions it well for servicing its existing debt while continuing to reward shareholders.

Result: Hold, based on balance sheet.

UPS currently pays a quarterly dividend of $0.67 per share, which it just increased in February from $0.62. In addition, UPS has a fairly decent track record of increasing its dividend annually, throughout most of its time as a publicly traded company. Dividend growth is an important characteristic that the IPIG portfolio actively seeks, and with a payout ratio of 58%, UPS has room to continue increasing its dividend as is business grows. 

Result: Hold, based on dividends.

All told: a company still worth owning
Looking at its valuation, its balance sheet, and its dividend, UPS still maintains the essential qualities needed to retain its place in the Inflation-Protected Income Growth portfolio. That may change over time, though, depending on the company, its competition, regulatory shifts, the whims of the market, and changes in its operating environment that affect its ability to thrive. As a result, the company will again be reviewed in the future to make sure it still deserves a spot in the portfolio.

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, simply click here.

Chuck Saletta owns shares of UPS. The Motley Fool recommends UPS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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