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United Parcel Service stock: satisfactory total return outlook

United Parcel Service (UPS) is the world’s largest parcel delivery company and a leading provider of global supply chain control solutions.

The company offers a wide range of cutting-edge products and services through its extensive international presence. It provides transportation, distribution, ocean freight, air freight, contract logistics, as well as customs brokerage and insurance.

While most people are familiar with the company’s iconic black pickup trucks, United Parcel Service operates one of the largest airlines in the world and the largest fleets of alternative fuel vehicles in the world.

Due to supply chain bottlenecks that persist to this day, UPS transportation services are more critical than ever, with the company handling record package volumes. As a result, UPS has delivered record results in recent quarters, enabling the company to realize expanding economies of scale that benefit its profitability.

Despite the company’s strengthened financials, I was neutral on UPS until recently, as I found its shares rather overvalued. However, after the stock’s notable decline over the past couple of months, I believe UPS shares may be relatively undervalued. Combined with juicy yield and accelerated capital returns, UPS’s total return outlook looks attractive, in my view. As a result, I am bullish on the stock.

Latest results

UPS started fiscal 2022 on a high note, with the company posting revenue of $24.4 billion, up 6.4% year-over-year. Note that management had predicted that its volumes may be slightly lower in the quarter based on volume estimates from some of its largest customers.

Although there was an attempt to close this gap with other business volumes, the underlying market conditions did not allow it. This resulted in a 3% decline in total average daily volume in the United States.

Nevertheless, revenues increased as UPS took advantage of the current supply chain crisis to raise prices. Specifically, revenue per piece increased by 9.5%, more than offsetting lower volumes.

At this point, it should be mentioned that the ongoing war in Ukraine is not expected to have a significant impact on the company’s operations in the future. Revenue from Ukraine, Belarus and Russia accounted for less than 1% of total UPS revenue last year.

On the contrary, additional logistical bottlenecks resulting from the ongoing war could lead to increasingly higher freight costs in Europe. This could already be starting to be the case, as revenue per coin outside of the US actually grew by 10.5%.

Throughout the quarter, UPS focused on leveraging its network management tools, automated facilities and other technologies to optimize its logistics network and operate it with increased flexibility. Combined with higher prices, UPS experienced a 70 basis point improvement in its operating margin to 13.6%.

As a result, more cash flowed into net income, resulting in diluted earnings per share of $3.05, up 10.1% from the same period last year.

Despite the release of a strong quarterly report, management likely remains cautious in reiterating its previous guidance. For fiscal 2022, the company expects revenue of approximately $102 billion, an operating margin of approximately 13.7%, and $5.5 billion in CapEx. However, amid an improving net profit outlook, the company raised its share buyback target for the year from $1 billion to $2 billion.

Accelerate capital returns

UPS’s $2 billion repurchase target for the year is quite significant, as it implies a sharp acceleration in the company’s capital returns. Assuming the company executes on that goal, it will be the highest amount it has repurchased since 2016. For context, last year the company only repurchased $500 million in stock.

This also seems to be the case with the UPS dividend. The company has a record of 13 consecutive annual dividend increases. The dividend growth rate has been somewhat lackluster over the past few years. In 2019, 2020 and 2021, the annual dividend per share increased by 5.5%, 5.2% and 1% respectively.

However, the latest 49% increase in UPS’s dividend was rather surprising. Along with the revised redemptions target for the year, I believe the company has confirmed that it is now aiming for increasing returns to capital.

UPS’s yield is currently hovering around 3.4%. Additionally, redemptions of approximately $2 billion this year should result in a “redemption yield” of approximately 1.3% at UPS’s current market capitalization. As a result, the company currently has a total capital return of around 4.7%, which is quite remarkable.

The Taking of Wall Street

On Wall Street, United Parcel Service has a Moderate Buy consensus rating based on 11 buys, eight takes and one sell assigned over the past three months. At $226.68, United Parcel Service’s average price target implies 23.3% upside potential.

Take away

Based on the company’s first quarter performance and repeated guidance from management, I expect the company to deliver FY2022 EPS of $12.80, which is in line with consensus estimates. . This implies that UPS is trading at a forward P/E of around 14.4. This is one of the lowest multiples the stock has traded at historically, with its average forward P/E close to 18-20 over the years.

Combined with the positive momentum in capital returns and the relatively favorable business outlook for the company going forward, I think the stock price is attractive. At its current price levels, investors are buying a remarkable total return, while possible tailwinds from a multiple expansion could further boost total returns.

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