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United Parcel Service: Growth and Dividends

United Parcel Service: Growth and Dividends
Roman Tiraspolsky/Dreamstime

By Wednesday, 28 October 2020 04:42 PM Current | Bio | Archive

Investors often have to choose between dividends and growth. For example, many stocks with the highest dividend yields generate little-to-no-growth, which limits the potential for outsized shareholder returns. On the other hand, many growth stocks have very low dividend yields, or do not pay a dividend at all.

But in rare cases, investors can find stocks that offer a mix of both qualities. United Parcel Service (UPS) is a good example of this, as the stock has a solid 2.5% yield and increases the dividend on a regular basis. UPS is also poised for strong growth in 2020 and beyond, thanks to the e-commerce boom.

UPS is a favored holding for many income investors, and even major institutional investors such as the Bill & Melinda Gates Foundation. The stock remains attractive for income investors looking for a mix of growth as well.

Blowout Earnings Results

United Parcel Service was founded in 1907. Today, it is a logistics and package delivery company that offers services including transportation, distribution, ground freight, ocean freight, insurance and financing. Its operations are split into three segments: US Domestic Package, International Package, and Supply Chain & Freight. UPS trades with a market capitalization of above $140 billion.

While so many economic sectors are struggling due to the coronavirus pandemic, UPS is firing on all cylinders. It is actually benefiting from the coronavirus, as lockdowns have prompted consumers to take their purchasing online. The e-commerce boom was already taking place heading in to 2020, and the onset of the coronavirus has only accelerated this trend.

In the 2020 third quarter, revenue increased 16% to over $21 billion. Average daily volume growth of 13.5% fueled UPS’ growth last quarter, as did price increases. Adjusted earnings-per-share increased 10% year-over-year. This was truly a blowout quarter for UPS, as it handily exceeded analyst estimates for revenue and EPS.

We expect continued growth for UPS in 2020 and beyond, as the company is benefiting from long-term tailwinds that are likely to last for many years. One such tailwind is e-commerce, which has led to growth in the number of packages that are transported across the country. With online shopping growth continuing to outpace brick-and-mortar growth for the foreseeable future, UPS should continue to benefit from strong demand for its services.

Shipping Dividends to Shareholders

UPS shareholders have benefited from the company’s impressive growth in recent years, both in terms of a rising share price, as well as dividends and regular dividend growth. UPS is simply a cash machine—through the first three quarters of the year, UPS generated operating cash flow of $9.3 billion and adjusted free cash flow of $5.9 billion.

Such strong cash generation allows the company to return cash to shareholders, through a combination of buybacks and dividends. The stock currently yields 2.5%. While UPS is not a high-yield stock, it does still beat the average S&P 500 yield, which is below 2% right now. And, UPS is a strong dividend growth stock.

According to the company, UPS has either maintained or increased its dividend for nearly 50 years. It has also managed a high dividend growth rate. Since 2000, UPS’s dividend has more than quadrupled. The company raised its dividend by 5% in 2020, a healthy raise that beats inflation.

Final Thoughts

When it comes to dividend stocks, investors often have to choose between yield and growth. But UPS is a unique mix of an above-average yield combined with excellent growth potential. UPS is capitalizing on the explosive growth of e-commerce. It should continue to generate growth in the years ahead, thanks to its competitive advantages and leadership of the logistics industry. With a 2.5% yield and regular dividend increases each year, UPS stock is an attractive buy for dividend growth.

Disclosure: The author is long UPS

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

 

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Investors often have to choose between dividends and growth. For example, many stocks with the highest dividend yields generate little-to-no-growth, which limits the potential for outsized shareholder returns. On the other hand, many growth stocks have very low dividend...
ups, growth, dividends, yield
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2020-42-28
Wednesday, 28 October 2020 04:42 PM
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