Since adding UPS (UPS) to our model Income Portfolio two years ago, it has returned 65%, most of that in the form of capital appreciation, notes Jim Pearce, growth and income expert and editor of Investing Daily's Personal Finance.
As a result of its rapidly escalating share price, the company’s most recent dividend declaration of $1.01 works out to a forward annual dividend yield of 2.4% at a $170 share price.
Should new investors jump on the bandwagon now at a relatively low yield expecting a steady diet of dividend hikes in the immediate future, or eschew UPS in favor of other companies with higher yields?
Certainly, UPS is generating enough cash flow to continue raising its dividend at an aggressive rate. Through the first nine months of this year, its cumulative cash flow from operations of $9.3 billion is roughly 60% ahead of last year’s pace.
That’s a lot of money that can be used in many ways. In April, the company suspended its share repurchase program to conserve cash. Although UPS has not formally stated that it will reinstate the plan, that announcement is likely in early 2021 if this quarter is as strong as the last one.
Regardless, the company intends to spend $2.2 billion on capital expenditures during Q4 and it could pay down some of the $25 billion in total debt that it carries at a weighted average coupon rate of 2.7%.
If all goes according to plan, those efforts should result in another dividend hike in 2021. Over the past seven years, UPS has increased its annual cash dividend payment by an average of 7.2%.
In hindsight, the timing of the firm's partnership with Amazon (AMZN) could not have been better — as homebound shoppers are getting packages delivered in record numbers.
UPS has also stated its readiness to “support COVID-19 vaccine distribution” which would help shore up its business-to-business shipping volume. Even without that added windfall, the company is poised to post solid financial results in 2021. We are raising our buy limit on UPS to $175.