United Parcel Service: Continues To Deliver The Goods, Now Show Me The Dividend Growth

Summary

United Parcel Service is a Dividend Contender with a 12-year streak of annual dividend growth. Shares currently yield 1.90%.

United Parcel Service is poised to benefit from the supply chain disruptions seen since early 2020 and further growth in global package delivery.

United Parcel Service is poised to deliver solid returns for investors.

Alex Wong/Getty Images News As we all learned over the last few years, home delivery of goods is critical and has been taking more share over traditional in-store purchasing. Spurred by the lockdowns and a fear of the unknown surrounding the pandemic, United Parcel Service ( UPS ) proved just how critical the business is to global commerce.

UPS operates in three segments: Domestic package delivery, International package delivery, and supply chain solutions. Source: Author; Data Source: United Parcel Services SEC filings

The TTM period shows impressive growth compared to FY 2020 of 9.1%, 18.6%, and 12.8% across each segment resulting in 11.6% overall growth. Considering that doesn’t include the expected growth from 4Q 2021 in the numbers, that’s quite impressive. Dividend History

As a dividend growth investor, I aim to invest my savings into businesses that generate more cash flow through their operations that they can then send out to me in the form of dividends. The strategy just appealed to me because dividends, assuming the business is picked right, are more consistent on a year-to-year basis and easier to predict than the sentiment of the market over a short period of time. Source: Author; Data Source: United Parcel Service Investor Relations

UPS has raised their annual dividend payout for 12 consecutive years. Their streak actually began in 1999, but came to an end in 2009 as dividends were frozen. Considering all that was going on in the financial world at that time, that’s definitely excusable.

Dating back to 1999, UPS’ year-over-year dividend growth has ranged from 0.0% to 126.7%, with an average of 14.4% and a median of 8.9%.

Over that same time, there have been 18 rolling 5-year periods with annualized dividend growth ranging from 5.5% to 30.1%, with an average of 10.5% and a median of 8.1%.

There’s also been 13 rolling 10-year periods with UPS’ annualized dividend growth ranging from 7.0% to 19.6%, with an average of 9.6% and a median of 8.3%.

The rolling 1-, 3-, 5- and 10-year period annualized dividend growth rates since 1999 can be found in the following table. Year Annual Dividend 1 Year 3 Year 5 Year 10 Year 1999 $0.300 2000 $0.680 126.67% 2001 $0.760 11.76% 2002 $0.760 0.00% 36.32% 2003 $0.920 21.05% 10.60% 2004 $1.120 21.74% 13.80% 30.14% 2005 $1.320 17.86% 20.20% 14.19% 2006 $1.520 15.15% 18.22% 14.87% 2007 $1.680 10.53% 14.47% 17.19% 2008 $1.800 7.14% 10.89% 14.37% 2009 $1.800 0.00% 5.80% 9.95% 19.62% 2010 $1.880 4.44% 3.82% 7.33% 10.70% 2011 $2.080 10.64% 4.94% 6.47% 10.59% 2012 $2.280 9.62% 8.20% 6.30% 11.61% 2013 $2.480 8.77% 9.67% 6.62% 10.42% 2014 $2.680 8.06% 8.82% 8.29% 9.12% 2015 $2.920 8.96% 8.60% 9.21% 8.26% 2016 $3.120 6.85% 7.95% 8.45% 7.46% 2017 $3.320 6.41% 7.40% 7.81% 7.05% 2018 $3.640 9.64% 7.62% 7.98% 7.30% 2019 $3.840 5.49% 7.17% 7.46% 7.87% 2020 $4.040 5.21% 6.76% 6.71% 7.95% 2021 $4.080 0.99% 3.88% 5.51% 6.97% Source: Author; Data Source: United Parcel Service Investor Relations

As a dividend growth investor, I want to make sure that the dividend is well covered by profits and cash flow so the dividend isn’t at risk of being reduced should the company stumble for a few years. All else being equal, a lower payout ratio is better as there’s also the possibility for dividend growth to exceed growth in the underlying fundamentals.

Source: Author; Data Source: United Parcel Services SEC filings

UPS’ payout ratio has fluctuated a lot over the last decade. The 10-year average net income payout ratio is 102% with a 5-year average of 104%. Excluding FY 2012 and FY 2020 that saw unusually low net income levels and the averages drop to 63% and 67%, respectively. Similarly, I’ve excluded FY 2017 and FY 2019’s free cash flow payout ratios which result in 10-year and 5-year averages of 54% and 62%, respectively. Quantitative Quality

When investing for the long-term the important thing is to focus on the business and let the dividends and capital gains take care of themselves because it’s the business fundamentals that will ultimately drive increased value. I like to take a historic perspective to see how the business has performed over time across a variety of financial metrics to see how it got to where […]

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