Sometimes, the best companies aren’t flashy growth businesses. Instead, they are the easy-to-understand companies that happen to be very good at what they do. For instance, look at what United Parcel Service has accomplished.
UPS has thrived during the peak of the Covid-19 pandemic as even more people have ordered packages online rather than shopping in person. It has sustained that momentum during 2021 as economies have reopened around the globe, leaning into the demand for healthcare package deliveries and helping to fuel the continuing growth of the e-commerce industry. Here are just a few reasons why UPS has continued to do well and why its stock is an excellent buy.
1. UPS has continued to deliver record numbers
At the time, 2020 was UPS’ best year yet. And its best ever quarter was the last three months of the year as it has thrived during the holidays. UPS has also addressed vaccine deliveries, capping 2021 off by delivering about 1.1 billion doses of the vaccine in total.
Established businesses tend to have a hard time following their record performances. Just look at Clorox’s struggles in beating its record year. However, UPS has risen to the challenge by growing its revenue by 11.5% during 2021 compared to the year before. It posted a free cash flow of $10.9 billion, more than twice what it had earned during 2020, booking a whole year operating margin of about 13.2% (the highest it has had in 15 years), and collecting $12.13 in diluted earnings per share.
The numbers really speak for themselves. But what has stood out is that UPS did this in a business environment that was easy to blame the supply chain shortages, the ongoing pandemic, inflation, labor shortages, rising interest rates. UPS didn’t shy away from any of these challenges. But it has delivered by beating one record year with another record year.
2. UPS has pricing power
UPS is a top player in a capital-intensive industry with a limited amount of competitors. This gives it the power to raise prices with little to no impact on the demand. During its third quarter of 2021 earnings call, UPS had announced a 5.9% general U.S. increased rate for 2022 to offset the higher costs. Similarly, its biggest competitor, FedEx, announced a 5.9% increase in its shipping rates for FedEx Express, FedEx Home Delivery and FedEx Ground, which went has went into effect January 3, 2022. In Dec. 2021, the U.S. Postal Service announced a 3.1% increased rate for most Priority Mail Express and Priority Mail services. Given that the whole industry is increasing prices, customers have little to no choice but to accept the higher costs.
3. UPS is still an inexpensive stock
UPS’ business is going very well and should continue to thrive even with the challenging climate of business. The cherry on top was the low valuation for its stock. Although UPS stock hit its new all-time high, it still closed the week out with a price-to-earnings ratio of around 18.5. Additionally, UPS fulfilled its promise of paying half of its adjusted EPS to its shareholders through a dividend. It has earned $12.13 in adjusted EPS during 2021, and just increased its 2022 dividend to $1.52 per quarter per share, or $6.08 per year per share, for a yield of 2.6%.