For The Long Term: UPS

United Parcel Service, Inc. (UPS) is a global leader in logistics, offering a broad range of solutions including transporting packages and freight; facilitating international trade and deploying advanced technology to more efficiently manage the world of business. UPS delivers packages each business day for 10 million customers in over 220 countries and territories. In 2015, UPS delivered an average of 18.3 million pieces per day, or a total of 4.7 billion packages. 

Market Leader

In 1907, 19-year old Jim Casey borrowed $100 from a friend and established the American Messenger Company in Seattle, Washington. Jim’s slogan for the business was “best service and lowest rates.” In 1919, the growing company made its first expansion beyond Seattle and adopted the United Parcel Service name. Jim’s strict policies of customer courtesy, reliability, round the-clock service and low rates are the principles which continue today to guide UPS, a market leader with more than $58 billion in sales. UPS’s first international operations started in 1975 when the company expanded its operations to Canada.

Today, UPS operates an international network serving more than 220 countries and territories, with international sales accounting for 22% of total revenues in 2015. Global package and freight shipments are expected to continue to grow as global ecommerce accelerates in the retail, healthcare, manufacturing and aerospace sectors.

As one of the largest transportation companies in the world, UPS is uniquely positioned to assist companies as they “go global.” Capitalizing on this, UPS is aggressively expanding international operations. UPS has built a massive international transportation network interconnected with one of the largest technological infrastructures in commercial history. Economies of scale, excellent customer service and operating efficiencies translate into high profitability for the firm. 

Strong Cash Flows

Since going public in 1999, UPS has parceled out brown boxes of free cash flow to shareholders via dividends and share buybacks which have totaled more than $58 billion. UPS increased its dividend 7% in 2016 to an annual rate of $3.12 per share with the dividend currently yielding an attractive 3.1%. The company has either increased or maintained its dividend every year for 47 years. The Board also recently reauthorized the company’s existing share repurchase program in the amount of $8 billion.

Over the past five years, the company has repurchased $14.3 billion of its own shares. During the first quarter of 2016, UPS generated $2.7 billion in cash from operations, paid dividends of $670 million and repurchased 6.8 million of its own shares for about $680 million, or $100 per average share.

Solid Outlook For 2016

UPS delivered first quarter sales of $14.4 billion, up 3% year-over-year, with net income of $1.13 billion, up 10% and EPS of $1.27, up 13%. U.S. Domestic Package sales increased 3% to $9.1 billion and average daily package volume rose 2.8%, driven by ecommerce. U.S. operating margins expanded on a 1.9% reduction in cost per unit, bolstered by technology and lower fuel costs. International revenues of $2.9 billion dipped nearly 2%, squeezed by lower fuel surcharges and foreign currency.

Daily export shipments increased slightly, as growth from Asia and Europe offset declines in U.S. exports. Operating profit sped ahead more than 15% to $574 million with improved performance from all regions on disciplined pricing and network efficiency gains. Supply Chain and Freight revenue raced ahead by more than 10% to $2.4 billion thanks to the Coyote Logistics acquisition in the third quarter of last year. Supply Chain operating profits declined nearly 3% to $147 million as total tonnage shipped remains challenged by current market conditions.

Given the momentum from this quarter’s solid revenue growth, improved network efficiencies and substantial operating profit growth, management reaffirmed guidance for 2016 full-year EPS of $5.70 to $5.90, an increase of 5% to 9% over adjusted 2015 results. Long-term investors should package up UPS for their portfolio. UPS is a HI -quality, highly profitable market leader with strong cash flows, an attractive dividend and a solid outlook for growth in 2016. Buy.