Long-term investors will warm to the neat 3.5% dividend yield at UPS.
Near-term challenges, long-term opportunity
Lee Samaha (UPS): There’s no avoiding the elephant in the room. The global economy is slowing in 2023, impacting package delivery volumes. That’s not good news for UPS; management has already lowered revenue expectations for 2023. The initial guidance range was $97 billion to $99.4 billion, now reduced to $97 billion. Similarly, management now expects an operating margin of 12.8% compared to initial guidance of 12.8%-13.6%.
It’s not just that the economy is slowing; there’s also a natural correction in demand from previous years’ surging growth in business-to-consumer (B2C) caused by stay-at-home measures. In addition, the recent agreement with the Teamsters union is seen as potentially threatening UPS’s cost expectations this year and therefore its full-year guidance.
As such, don’t be surprised if UPS disappoints with its guidance on Aug 8.
That said, it’s essential to put these near-term issues into context. There’s little management can do about slowing demand. Still, it can continue to transform its business through its initiatives to focus on end markets like small and medium-sized businesses (SMB) and healthcare while continuing to improve margins by being more selective over deliveries.
It’s been a highly successful strategy and positions UPS very well to grow profits when its overall end markets improveMeanwhile, its $5.1 billion dividend payout is easily covered by its expected $8 billion in free cash flow in 2023. All told, look out for UPS’s earnings in August, as it could create a compelling buying opportunity in a dividend investing favorite.
