FedEx (FDX 0.05%) recently hit its all-time high, but it's not too late for investors to buy this bellwether stock. The freight and parcel delivery powerhouse operates in a highly competitive environment, and it's prone to economic cyclicality. However, the company delivers reliably strong financial results and impressive efficiency metrics. Investors can own a great company without breaking the bank.
Fundamentals play an important role
FedEx stock is up more than 20% year to date, pushing it within a dollar of its $315.59 all-time high, set in 2021. Investors should be wary of stocks streaking to all-time highs based purely on speculation and runaway valuation ratios. Gains in those scenarios are based solely on investor sentiment, which can be fickle and subject to rapid change.
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Fortunately, the justification for FedEx's performance is concrete. The business is approaching all-time highs for revenue, free cash flow, and dividends per share. On the back of a few impressive quarters, its valuation is supported by substantive business fundamentals.
FDX Revenue (TTM) data by YCharts.
FedEx recently announced strong fiscal fourth-quarter results in June. The company beat analyst estimates for revenue and profits. It also provided healthy guidance for the next fiscal year, which it partially attributed to recovering package delivery volume. Weak delivery volumes have weighed on results for several consecutive quarters. The company managed to keep moving in the right direction due to efficiency gains, so a macroeconomic-driven recovery in delivery volume would be an enormous bullish signal to build on FedEx's internal efforts.
The company improved its profits and key efficiency metrics despite dealing with challenging conditions for the top line. The company increased revenue per package while enacting targeted cost-controlling measures. The organization achieved demonstrable efficiency gains in its ground delivery operations. This allowed FedEx to maintain a stable gross margin and return on invested capital (ROIC). Those are important metrics for assessing the operational efficiency of a business like FedEx, and the data looks favorable.
FDX Return on Invested Capital data by YCharts.
There was nothing groundbreaking about these improvements -- just the exact sort of execution that investors like to see from mature businesses going through a challenging time. It's how shareholder value is created, and it speaks to the management team's capital stewardship.
FedEx still has a reasonable valuation
Even with this recent success and momentum, FedEx stock is still cheap enough to provide long-term upside. Its forward price-to-earnings (P/E) ratio indicates a discount relative to its biggest rival, UPS (NYSE: UPS).
FDX PE Ratio (Forward) data by YCharts.
Its 1.7% dividend yield is less impressive, so it's probably not a great source of cash flow for income investors. However, its 30% payout ratio leaves plenty of room for dividend growth. That's a key consideration for long-term value investors.
Financial health isn't a threat to dividend growth, either. FedEx maintains a debt-heavy capital structure -- its long-term debt-to-equity ratio is over 0.9. That's not necessarily a bad thing for equity investors, and its financial health metrics are generally sound. The company's interest coverage ratio was nearly 7.5, so it's not struggling to meet its debt obligations.
Its current ratio of 1.4 suggests that it has ample liquidity. Last year the company produced $3.2 billion of free cash flow, well above the $1.3 billion distributed to shareholders as dividends.
In short, FedEx's financial health and cash flow are more than sufficient to deliver meaningful dividend growth if the management team decides to do so. Instead, it elected to spend $2.5 billion on share repurchases last year.
The days of rapid growth are behind FedEx, but you don't need a home run with every stock in your portfolio. A reliable value stock with long-term upside can play a highly effective role in complementing dynamic growth stocks in your portfolio.
