UPS earnings may miss expectations, but the dividend is highly unlikely to.
UPS faces considerable headwinds in 2023, but its dividend looks safe
Lee Samaha (UPS): The primer and sub-heading outline much of what I want to say here. There’s little doubt the company will face challenging end markets in 2023. A slowing economy usually means less demand for parcel deliveries, and disruptive labor negotiations haven’t helped either.
Management started the year expecting full-year revenue of $97 billion to $99.4 billion, only to cut expectations to $97 billion in April, and then to $93 billion in August. Over that period full-year adjusted operating margin expectations have been cut from a high of 13.6% to just 11.8% – implying a cut in full-year adjusted operating expectations from $13.5 billion to $11 billion.
Could earnings expectations be cut more in 2023? I think the answer is “yes.” Interest rates continue to pressure consumer discretionary spending, and China’s recovery has been weaker than most expected it to be while the conflict in Europe continues.
Still, two things haven’t changed for UPS. First, its capital allocation plans for a dividend payout of $5.4 billion and share repurchases of $3 billion. Second is management’s commitment to investing in targeted markets like small and medium-sized businesses (SMB) and healthcare markets. In addition, UPS continues to invest in productivity-enhancing initiatives like smart packaging facilities.
Those initiatives should result in increased profitability and margins when the market inflects, as history suggests it will. Meanwhile, investors can enjoy a sustainable 3.9% dividend yield while they wait for a recovery.
