FedEx Corporation (NYSE:FDX) can deliver packages overnight, but are its dividend deliveries the best investors can get? Despite FedEx's fierce fundamentals and eager expansion, United Parcel Service (NYSE:UPS) may simply be a better dividend buy -- here are three reasons why.
1. More Dividend For Your Dollar
For FedEx Corporation and United Parcel Service investors, UPS is a clear front runner with regards to absolute dividend yield. The company sports a 3% annual dividend yield over the past five years, compared to just 0.6% for FedEx. At these rates, that means it would take UPS investors around 33 years (assuming no growth in the distribution) to double their investment entirely via dividend distributions, while FedEx shareholders would have to wait for 167 years.
A distribution today doesn't mean there'll be one tomorrow, and it's equally important to consider the sustainability of each corporation's dividend. An easy metric that many analysts use to determine the sustainability of a dividend is a company's "payout ratio" -- the percentage of earnings that a company distributes as dividends. If a company's paying out a high percentage of its earnings as dividends, it may not have much wiggle room to keep delivering.
For United Parcel Service and FedEx Corporation, their payout ratios fall well within the boundaries of a sustainable dividend. For UPS, its 50% payout ratio equates to a belief that dividend distribution is one of the core ways it can return value to investors. For FedEx Corporation, its 20% ratio means the corporation has other uses for the cash, such as its recently proposed $4.9 billion acquisition of Netherlands-based TNT Express to expand its European operations.
3. Past Precedent
While past precedent is not necessarily an indicator of future performance, corporations have a high degree of control over their dividends. They may not control whether their sales increase or decrease, but management makes the internal call to determine its distribution amount. Over the past decade, both United Parcel Service and FedEx Corporation have steadily increased distributions in a "dividend staircase" pattern -- slow and steady bumps.
And while UPS investors currently enjoy distributions nearly four times the size of their FedEx counterparts, FedEx has been more aggressive with growing its dividend. In 10 years' time, FedEx management has increased distributions 150%, compared to 85% at United Parcel Service. In other words, dividends have become a bigger deal for FedEx over the past decade, even as UPS maintains a clear distribution lead.
More than Dividends
They're a steady stream of dependable income -- usually. For any investor interested in buying FedEx Corporation or United Parcel Service stock, it's essential to look beyond dividend stats, alone. Despite their similar businesses, these two stocks offer investors two distinct and divergent investing strategies. United Parcel Service investors have enjoyed and will most likely continue to enjoy bigger dividend payouts, but FedEx may be a better buy for growth-oriented investors. So do your homework, make your portfolio pick, and continue to monitor these two stocks to make sure that your investment decision is delivering what you want, dividends or otherwise.
Justin Loiseau owns shares of United Parcel Service and many cardboard boxes. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.