United Parcel Service Stock: Satisfactory Total-Return Prospects

United Parcel Service (UPS) is the most prominent package delivery company across the globe and a leading provider of international supply chain control solutions.

The company provides a wide range of industry-leading products and services via its vast 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 vans, United Parcel Service operates one of the biggest airlines in the world and the world’s biggest fleets of alternative-fuel vehicles.

Due to supply chain bottlenecks lasting to this day, UPS’s transportation services have been more critical than ever, with the company processing record parcel volumes. As a result, UPS has been posting record results over the past several quarters, allowing the company to achieve expanding economies of scale that benefit its profitability.

Despite the company’s strengthened financials, I was neutral on UPS up until recently, as I found its shares rather overvalued. Following the stock’s notable decline over the past couple of months, however, I believe that UPS shares could be relatively undervalued. Combined with a juicy yield and accelerating capital returns, UPS’s total return prospects appear attractive, in my view. Accordingly, I am bullish on the stock.

Latest Results 

UPS entered Fiscal 2022 on a high note, with the company posting revenues of $24.4 billion, up 6.4% year-over-year. Note that management had predicted that its volumes could be slightly down during the quarter based on volume estimates from some of its largest customers.

While there was an attempt to fill this gap with other enterprise volumes, the underlying market conditions didn’t allow for that. This resulted in the total average daily volume slipping 3% in the U.S.

Nevertheless, revenues grew as UPS took advantage of the ongoing supply chain crisis to raise pricing. Specifically, revenues per piece rose 9.5%, more than offsetting the volume decline.

At this point, it’s worth mentioning that the ongoing war in Ukraine should not have a significant impact on the company’s operations, moving forward. Revenues from Ukraine, Belarus, and Russia represented less than 1% of UPS’s total revenues last year.

If anything, additional logistic 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 piece outside of the U.S. actually rose by an even larger 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 enhanced flexibility. Combined with higher pricing, UPS recorded a 70 basis point improvement in operating margin, which reached 13.6%.

Accordingly, more cash flowed down to the bottom line, resulting in diluted earnings per share coming in at $3.05, up 10.1% from the same period last year.

Despite posting a strong quarterly report, management likely remains prudent as they reiterated their previous guidance. For Fiscal 2022, the company expects revenues of about $102 billion, an operating margin of around 13.7%, and $5.5 billion in CapEx. However, amid improved net income prospects, the company raised its share repurchases target for the year from $1 billion to $2 billion.

Accelerating Capital Returns

UPS’s $2 billion buyback target for the year is quite important, as it implies a steep acceleration when it comes to the company’s capital returns. Assuming the company executes this target, it will be the highest amount it has repurchased since 2016. For context, last year, the company only repurchased only $500 million worth of stock.

This also appears to be the case with UPS’s dividend. The company features a track record of 13 consecutive annual dividend hikes. The dividend growth rate was somewhat uninspiring over the past few years. In 2019, 2020, and 2021, the annual dividend per share rose by 5.5%, 5.2%, and 1%, respectively.

However, UPS’s latest dividend increase of 49% was rather surprising. Along with the revised target for buybacks for the year, I believe that the company has solidified that it now targets growing capital returns.

UPS’s yield currently hovers near 3.4%. Further, buybacks of around $2 billion this year should translate to a “buyback yield” of around 1.3% at UPS’s current market cap. Hence, the company currently features a total capital return yield of around 4.7%, which is rather noteworthy.

Wall Street’s Take

Turning to Wall Street, United Parcel Service has a Moderate Buy consensus rating based on 11 Buys, eight Holds, and one Sell assigned in the past three months. At $226.68, the average United Parcel Service price target implies 23.3% upside potential.

Takeaway

Based on the company’s performance in Q1 and management’s reiterated guidance, I expect the company to deliver EPS of $12.80 for Fiscal 2022, matching consensus estimates. This implies that UPS is trading at a forward P/E of around 14.4. That’s one of the lowest multiples the stock has traded at historically, with its forward P/E averaging close to 18-20 through the years.

Combined with the positive momentum in capital returns and a relatively favorable trading outlook for the company going forward, I believe the stock is attractively priced. At its current price levels, investors are buying into a noteworthy total return yield, while possible tailwinds from a multiple expansion could further boost total returns.

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