UPS Hikes Dividend

Zacks

Leading package delivery company, United Parcel Service Inc. (UPS) announced a dividend increase for its outstanding Class A and Class B shares. The board of directors announced an increase of 8.8% to 62 cents per share payable on Mar 12, to shareholders of record on Feb 25, 2013.

Further, the company has announced a share repurchase program of $10 billion that replaces the existing program that began in 2012. The new share repurchase program is without an expiration date.

UPS continues to return cash to shareholders in the form of increased dividends and share repurchases. It projects return on invested capital of at least 25% by 2014 and free cash flow to exceed 100% of net income each year. The company raised its quarterly dividend by 9.6% to 57 cents per share for fiscal 2012 from 52 cents in 2011. With respect to buybacks, the company raised its target for 2013 from $1.5 billion to $4.0 billion.

Despite the disappointing end to the $6.8 billion mega acquisition of Dutch shipping company, TNT Express and an economic setback that affected the demand trend, an increase in shareholders return underpins the company’s strength with respect to its market position and ability to safeguard shareholders' value despite unfavorable market dynamics. As a result, the company continues to remain optimistic over its 2013 earnings results, which are expected to grow in the range of $4.80 to $5.06 per share, representing an increase of 6–12% from the 2012 level.

The company’s financial strength drives growth through strategic investments, technology-backed operations and an enhanced worldwide network. UPS seems to look beyond the failure of the TNT deal and banks on smaller acquisitions that it carried out in Europe to expand its global footprint. In Dec 2011, the company acquired Italian pharma logistics provider Pieffe Group to enhance its position in North and South America, Europe and Asia. Following this, it acquired a Belgian e-commerce company, Kiala in Feb 2012.

Moreover, we are encouraged by the company’s positive outlook on most of its segments, for the year. United Parcel Service expects revenue growth in the mid single-digit range in its domestic package business, buoyed by 2–3% volume growth. International business is estimated to account for a mid single-digit revenue growth with higher domestic and export daily volumes.

Further, Supply Chain and Freight businesses would see mid-to-high single-digit revenue growth and reap profits of approximately 10%. In addition, the segment is expected to sustain a margin growth of at least 8% despite significant investments in business expansion in the health care markets.

However, we remain concerned about volatile economic conditions that continue to restrict market demand. Further, the company is also exposed to unionized workforce and intense competition from giants like FedEx Corporation (FDX).

 Other Stock

Air Transport Services Group Inc. (ATSG) and Deutsche Post AG (DPSGY), both with a Zacks Rank #2 (Buy), are the other stocks worth considering in this sector.

UPS has a Zacks Rank #3 (Hold).

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