United Parcel Service Delivers Shareholder Value

Key Points

• United Parcel Service moves up on mixed results. 
• Cash flow remains strong and capital returns are growing. 
• New highs may be set but new all-time highs may not come until 2024. 

United Parcel Service's NYSE: UPS Q4 results and outlook echoed a report from Whirlpool Corporation NYSE: WHR in that investors love blue chip quality stocks for long-term gains. These companies are not growing, they aren’t showing all that much strength, but they are showing resilience and the ongoing ability to generate revenue, produce cash flow, and pay their investors to own them.

And they are high-yielding stocks that trade at a value to the broad market. In the case of United Parcel Service, the company announced a 6.6% increase to the dividend for the 14th consecutive annual increase with a yield near 3.65%. UPS also announced a new share repurchase program. The new program replaces the existing one and is worth $5 billion to shareholders or about 3.25% of the market cap, with shares trading near $177. 

United Parcel Service Rises On Mixed Results 

United Parcel Service shares are moving higher on mixed results because the company is showing strength where it counts, on the bottom line, and the outlook for capital returns is favorable. The revenue of $27 billion is down 2.7% from last year, however, and missed the consensus by 350 basis points on weakness in Supply Chain Services and the International Market.

The decline in Supply Chain Services is evidence of slowing demand coupled with supply-chain-easing that will likely weigh on results for the next quarter or 2 at least. The weakness in International segments is due to a decline in total volume that includes softness in the Chinese segments. US Domestic, the company’s core business, grew by 3.1% to offset the other weaknesses and was aided by a 7.2% increase in prices.

The company experienced margin pressure and is forecasting more of the same, but earnings came in above the Marketbeat consensus figures. The $3.62 in adjusted earnings is up 0.8% versus last year due to share repurchases, and it beat the consensus by $0.03, which is more important.

The takeaway is that earnings are sufficient to cover the dividend payment and the capital returns and expenditures plans. Revenue and earnings are expected to weaken, but the takeaway is the same. The $97 to $99.4 billion in revenue is expected to generate nearly $12.5 billion in consolidated operating cash flow and support the capital plans for 2023 with only a little bit of help from cash reserves or debt. 

Analysts' Sentiment Is Firming In United Parcel Service 

No new coverage has shown up on Marketbeat’s analyst tracking page yet, but it is sure to come. The bias in sentiment is bullish, however, even with some late 2022 bearishness because older and more-bearish sentiment is falling out of the data set.

As it stands, the company is rated at a firm Hold verging on Buy with a price target that is not only firming in the near term but offers about 12% of upside for investors. Institutional activity is also firming and should help support the price action over the next quarter or two. The institutions netted about $2.75 billion of the stock over the last year and have their ownership over 58%. 

The price action reflects the firming sentiments and shows the market forming a bottom. The question now is if this bottom is a switch from down to sideways or down to up; for now, the answer is down to up. The caveat is that resistance may be heavy at the top of the current range cap gains in the near term. Longer-term, patient investors should be rewarded with new all-time highs but that may not come until 2024.

Until then there is always the 3.65% dividend yield, plans for share repurchases and the low 13.7X earnings valuation to keep the market interested. In this scenario, pullbacks in price action and retests of support or the bottom of the range can be expected to produce buying signals.