UPS Delivers with E-Commerce and Global Growth

03/30/2018 5:00 am EST


Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

In 1907, 19-year-old Jim Casey borrowed $100 from a friend to launch the American Messenger Company; in 1919, he expanded beyond Seattle and adopted the name United Parcel Service (UPS), notes Ingrid Hendershot, value oriented money manager and editor of Hendershot Investments.

Jim Casey’s strict policies of customer courtesy, reliability, round-the-clock service and low rates are the principles which continue today to guide UPS, a market leader with nearly $66 billion in sales. Today, UPS runs an international network serving more than 220 countries and territories.

Global package and freight shipments are expected to continue to grow as global e-commerce accelerates in the retail, healthcare, manufacturing and aerospace sectors. As one of the largest transportation companies in the world, UPS is uniquely positioned to assist companies as they “go global.”

UPS has constructed a massive international transportation network interconnected with one of the largest technological infrastructures in commercial history, unlikely to be replicated by many. Economies of scale, excellent customer service and operating efficiencies translate into high profitability for the firm.

UPS has a flexible capital allocation strategy which allows the company to reinvest in its business, make dividends a priority and take a balanced approach to share repurchases.

Since going public in 1999, UPS has parceled out brown boxes of free cash flow to shareholders via dividends and share buybacks which have totaled more than $73 billion.

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UPS increased its dividend 10% in 2018 to an annual rate of $3.64 per share with the dividend currently yielding an attractive 3.5%. UPS has either increased or maintained its dividend every year for nearly 50 years.

During 2017, UPS made capital expenditures of $5.2 billion, paid dividends of $2.9 billion, an increase of 6.4% over the prior year, and repurchased 16.1 million shares for about $1.8 billion at an average cost of $111.80 per share.

Management’s outlook for 2018 is for adjusted EPS in the range of $7.03-$7.37, which represents high double-digit growth. Under the tax reform, UPS’s tax rate is set to fall from 35% to the 23% - 24% range, adding $.80-$.85 per share to EPS and cash flow in 2018.

With the savings, UPS plans to accelerate investments in its growing network, producing expected returns on invested capital in the 23%-28% range. During the next few years, UPS plans to annually invest $6.5 billion to $7 billion, about 10% of revenues, in new technology, aircraft and automated capacity, taking advantage of the 100% deductibility permitted for capital investments under the new law.

At the same time, UPS expects to continue to increase its dividend and plans to repurchase $1 billion of its shares in 2018. Long-term investors should package up UPS for their portfolio. UPS is a high-quality, highly profitable market leader with strong cash flows, an attractive dividend and a solid outlook for growth in 2018 and beyond. Buy.

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