Delivering the Goods
03/23/2009 11:01 am EST
Jack Adamo, editor of Jack Adamo’s Insiders Plus, says one package delivery company is poised to gain ground even during the current recession.
We added a 2% position in United Parcel Service (NYSE: UPS) in our income portfolio. After being stripped of most of our dividends in US Bancorp (NYSE: USB) and Wells Fargo (NYSE:WFC), I wanted a more reliable source of income.
UPS is rock solid and has no fancy financial instruments. It does hedge its fuel costs, but that’s plain vanilla protection. The shares yield 4.2% at Friday’s closing price. The company’s interest coverage for the recently ended fiscal year was more than nine times.
Dividend coverage based on earnings was more than two times (a conservative payout ratio of less than 50%), but when measured against operating cash flow, it soars to an even safer 3.8x. That metric is meaningful because many items that affect current income have no cash impact; hence, any short-term earnings problems during recessions do not threaten the firm’s ability to maintain its dividend.
Fuel prices, which are typically hedged six months in advance, are coming down now. Before the big run-up in gasoline, fuel made up 6.5% of the company’s operating expense. It rose to 9% last year, but with prices well below half their peak, there will be significant relief in that area.
There’s also plenty of good news in UPS’s competitive position that should yield dividends in coming years. DHL, one of its erstwhile feared competitors in the industry, has not only thrown in the towel on US deliveries, it is hiring UPS to sort and fly its packages here.
In addition, FedEx (NYSE: FDX) suffered a setback last year that will eventually cause it to lose an advantage it used to have, and level the playing field. Because it structured itself as a franchise business, FedEx Ground (a separate situation from its air services) avoided unionization.
But the courts struck down its assertions, saying its drivers were, de facto, employees. FedEx employees can now unionize, as UPS employees have been for decades. Since UPS was already competitive with FedEx, despite the latter’s employee cost advantage, the additional costs to FedEx should enable UPS to pull far ahead.
In addition, UPS has a great head start in China, where it has a good relationship with the government. (Last week, FedEx warned investors its fiscal fourth quarter ending May would be weaker than expected, and the stock fell amid fears of weakening demand—Editor.)
All these factors tell me it’s a good time to buy the stock, despite the recession. Buy United Parcel Service up to $45. (The stock closed below $45 Friday—Editor.)