By Demitrios Kalogeropoulos | More Articles | Save For Later
January 31, 2013 | Comments (0)
There's at least one silver lining for UPS (NYSE: UPS ) shareholders who are understandably miffed about the company's failed bid to acquire TNT Express. Thanks to the canceled deal, UPS now finds itself flush with cash. And it plans to pour billions of that treasure into share buybacks in 2013.
It's true that the delivery giant would rather have won the deal. Until just a few weeks ago, UPS was ready to fork over almost $7 billion for the Dutch delivery firm, which would have given it a huge presence in Europe. But regulators nixed the purchase on antitrust grounds, worried that it could unfairly lock out competitors like FedEx (NYSE: FDX ) from the parcel delivery market. UPS will have to find another way to expand its global footprint.
Still, the canceled bid does free UPS to deliver tons of additional cash to shareholders now. That's why it's no surprise that the company just tripled its forecast for share buybacks in 2013, from $1.5 billion to now $4 billion. By comparison, it spent just $1.6 billion on share repurchases last year.
The company's holiday-quarter results also left UPS with plenty of financial flexibility. It generated $5.4 billion of cash flow in 2012, after accounting for capital expenditures of over $2 billion. Yes, operating margin ticked down by two-tenths of a percent, to 14.1%. But that still trounces FedEx's profitability, which has been trending at around 7% for the year.
And UPS saw solid volume growth, particularly in the U.S., where e-commerce activity is spiking. Overall, average daily package volumes rose by a healthy 500,000 packages in the quarter.
With major acquisitions off the table, shareholders can look forward to owning a greater piece of those solid business results as UPS draws down its pool of outstanding shares. And dividends will keep flowing as well. Shares yield close to 3% right now, on a high, but supportable, payout ratio of 64%.
UPS' management might not be happy about missing out on the TNT Express deal. But as far as second-best options go, shareholders have plenty of reasons to be pleased.
Hey Mike, I'm glad to read a summary from an analyst who sees the bigger picture. After reading the CC script on Seeking Alpha, I thought we positioned ourselves perfectly for an upside surprise this year. We mentioned the 2 headwinds of pension and break-up fees (plus one less operating day in Q1) as well as cautioning on international growth based on Asian volumes and deferred service level options. I think that was smart of management to lay that expectations groundwork. What surprises me the most is what I consider to be the puzzling "analytical" work of those who call themselves analysts. For example, it appeared that very few even thought to consider how much of a negative impact super storm Sandy would have on our Q4 results. There was no appreciable lowering of consensus estimates by the group even after FDX reported the impact on their results just a month earlier. UPS reported the storm cost us $.05 but it was probably higher since some things are hard to quantify. Beyond that, how could they miss the clear impact of the low interest rate environment on pension programs? How about the elevated fuel costs during Q4 in addition to the general global economic malaise? None of these factors were considered important enough to lower expectations just a bit? I guess we need to wait to see who got the coveted 5-star analyst award for Q4 because they were the clear thinkers in the group and should be the ones that we investors should take our guidance from.