United Parcel Service (UPS +0.06%) operates a global network of transportation services for businesses and consumers.
While you're probably familiar with UPS in some capacity, you might be unfamiliar with UPS as a stock. Here's why UPS is a dividend investor's dream.
Strong (if not consistent) dividend growth
Although not a Dividend Aristocrat, there are many reasons why UPS is one of the best dividend stocks in the industrial sector.
In the year 2000, UPS was paying a $0.17 per share quarterly dividend, or $0.68 per share annually. In 2019, UPS paid $0.96 per share quarterly, or $3.84 per share for the year, representing a more than 500% dividend raise in 20 years.
Image Source: Getty Images.
During that stretch, UPS never cut its dividend, and there were only two years where it didn't raise it. Add it all up, and you have $40.60 of low-tax dividend payments per share over that time, and that doesn't even include the appreciation of the company's stock price.
UPS yields 3.6% at the time of this writing, nearly double the average yield in the S&P 500 index.
Some headwinds to account for
UPS's dividend continues to grow and sports a high yield, but the company isn't without its risks. For starters, UPS's debt-to-equity and debt-to-capital ratio -- two key financial metrics -- have been climbing as the company continues to take on debt to grow its e-commerce and healthcare businesses.
UPS Debt to Equity Ratio (Annual) data by YCharts
The downside of UPS using a significant portion of its free cash flow to pay dividends is that it leaves the company with less retained earnings, meaning it finds itself continuously turning to debt in an effort to grow its business. Yet not all debt is bad. If you're a believer that UPS is using debt to expand its growth potential so that its services and fleet can meet the needs of businesses and consumers that are increasingly relying on shipping, then the investment is arguably justified. However, making sure that UPS's debt doesn't get out of hand from overinvestment is something to watch.
Unfortunately, the COVID-19 pandemic has led to a fall in business-to-business (B2B) volume but a rise in business-to-consumer (B2C) volume as business slows but more time at home has led to more consumer volume. While this may sound like a fair trade-off, it's not. B2C growth can mean higher revenue, but it can also lower margins due to higher delivery costs.
As a result of the uncertainty, UPS suspended its share buyback program, reduced 2020 capital expenditures by $1 billion, and withdrew its 2020 guidance.
Some tailwinds, too
The good news is that the economy has been recovering faster than expected as people go back to work, businesses large and small open back up, and life returns somewhat to normal. UPS noted that as China began to recover in March, "Asia outbound business accelerated both air freight and small package, including the healthcare, high-tech and e-commerce sectors." Hopefully, a recovery in Europe and the US would follow a similar trajectory.
In the meantime, UPS's healthcare investment seems to have paid off as UPS Premier, the company's critical healthcare shipment service, has been answering the needs of the healthcare industry in response to the pandemic. In this way, UPS is on the frontlines of supporting medical professionals with time-sensitive shipments.
A quality income stock
Like other industrial stocks, UPS's business tends to ebb and flow with the broader economy, so there's an inherent risk that if the economy slows, so will UPS. That being said, the company's investments in e-commerce and healthcare have already given the company a distinct advantage over its competitors.
UPS isn't immune to risk, but the company has proven itself to be a leader in the transportation space. Throw in a high-quality and high-yielding dividend that should continue to grow, and you have a well-balanced company with the potential to reward investors for years to come.
