United Parcel Service (NYSE: UPS)
QVI Research Report | Updated Coverage | May 2023
Summary
Whether in the neighborhood, workplace, highway, or airport, Big Brown is everywhere transporting and delivering packages.
The average shareholder yield for UPS was 4.90% or +148 bps above the 10-Year Treasury.
Fundamentals suggest that UPS’s management continues its long history of running a conservative enterprise.
Weighting the preferred valuation multiples suggests that the market considers UPS to be trading at a reasonable stock price with below-average downside risks.
In this updated research report, QVI has maintained its view of UPS in the Expanded Portfolio.
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United Parcel Service Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
United Parcel Service (NYSE: UPS) is a dividend-paying large-cap stock in the industrials sector’s air freight and logistics industry. UPS was added to the QVI Expanded Portfolio on February 17, 2022, at a split and dividend-adjusted $202.18 a share.
United Parcel Service, Inc., a package delivery company, provides transportation and delivery, distribution, contract logistics, ocean freight, air freight, customs brokerage, and insurance services. It operates through two segments, U.S. Domestic Package and International Package.
The U.S. Domestic Package segment offers time-definite delivery of letters, documents, small packages, and palletized freight through air and ground services in the United States. The International Package segment provides guaranteed day and time-definite international shipping services comprising guaranteed time-definite express options in Europe, Asia, the Indian subcontinent, the Middle East, Africa, Canada, and Latin America.
The company also provides international air and ocean freight forwarding, post-sales, and mail and consulting services. In addition, it offers truckload brokerage services; supply chain solutions to the healthcare and life sciences industries; financial and information services; and fulfillment and transportation management services.
United Parcel Service, Inc. was founded in 1907 and is headquartered in Atlanta, Georgia, USA.
QVI’s value proposition elevator pitch for United Parcel Service:
Whether in the neighborhood, workplace, highway, or airport, Big Brown is everywhere transporting and delivering packages.
Performance vs. Sector and Market
The chart below illustrates UPS’s performance against the Industrial Select Sector SPDR® Fund ETF (NYSE: XLI) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of United Parcel Service in February 2022.
For example, UPS has underperformed its sector and the broader market in total returns during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit United Parcel Service’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for United Parcel Service: Bullish.
UPS Total Return vs. XLI and SPY
United Parcel Service Inc (UPS) Total Return: -14.48%
Industrial Select Sector SPDR ETF (XLI) TR: +2.35%
SPDR S&P 500 ETF Trust (SPY) Total Return: -4.08%
Since February 17, 2022 (as of May 10, 2023)UPS Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
UPS’s earnings yield traded above the QVI targeted floor at 7.20%, as demonstrated in the below chart. On the contrary, at 4.78%, UPS’s free cash flow yield traded under the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that UPS trades at a fair price. QVI will further explore valuation multiples later in this report.
Dividend Yield
United Parcel Service offers a forward dividend yield of 2.72%, supported by a moderate 51.07% payout ratio, thus indicating a dividend rate with little room for additional annual increases.
UPS yielded 3.21% from an annual payout of $6.48 on a split- and dividend-adjusted cost basis of $202.18 per share on February 17, 2022, the date of QVI’s initial stock coverage. Thus, our yield-on-cost basis was +49 bps above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.42% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for UPS was 4.90% or +148 bps above the 10-Year and 5.06% or +164 bps above the Treasury yield when using QVI’s February 2022 yield-on-cost basis.
QVI’s shareholder yields rating for UPS: Bullish.
UPS Shareholder Yields
United Parcel Service Inc (UPS) Price: $171.56
United Parcel Service Inc (UPS) Earnings Yield: 7.20%
United Parcel Service Inc (UPS) Free Cash Flow Yield: 4.78%
United Parcel Service Inc (UPS) Dividend Yield: 2.72%
One-Year Trailing (as of May 10, 2023)United Parcel Service Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, United Parcel Service had positive three-year annualized double-digit revenue growth of 10.64%, underperforming the 12.66% median growth of the industrials sector.
Farther down the income statement, United Parcel Service had a trailing three-year single-digit net profit margin of 8.86%, outperforming the sector’s median net margin of 6.42%
Returns on Equity and Invested Capital
United Parcel Service’s management produced a trailing three-year return on equity or ROE of 89.58%, far surpassing the targeted threshold and trouncing the sector’s median ROE of 13.64%
Stock buyback programs often elevate ROE. For example, in January, United Parcel Service’s board of directors authorized an additional $5 billion in stock buybacks after repurchasing $3.5 billion in 2022.
At 24.63%, United Parcel Service’s three-year return on invested capital, or ROIC, is well above the QVI threshold and far outperforms the sector’s median ROIC of 6.97%, indicating that its senior executives are outstanding capital allocators.
In addition, United Parcel Service’s ROIC doubles its weighted average cost of capital, or WACC, of 10.04%. (Source of WACC: GuruFocus).
Positive double-digit revenue growth, a high single-digit profit margin, and robust, sector-beating returns on equity and invested capital suggest that United Parcel Service’s management continues its long history of conservative yet 2nd level performance in Atlanta.
QVI’s fundamentals rating for United Parcel Service: Bullish.
UPS Returns on Management
United Parcel Service Inc (UPS) Revenue (3y Growth): 10.64%
United Parcel Service Inc (UPS) Profit Margin (3y Median): 8.86%
United Parcel Service Inc (UPS) ROE (3y Median): 89.58%
United Parcel Service Inc (UPS) ROIC (3y Median): 24.63%
Three-Year Trailing (as of May 10, 2023)UPS Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of United Parcel Service, Inc. (UPS), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial positions through direct ownership of any stocks mentioned thus far in this report. I wrote this post myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
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About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. David and his wife, Suzan, reside in historic South Central Pennsylvania, USA.
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