Introduction

United Parcel Service Inc. (UPS) currently offers a dividend yield in excess of 3%.  Moreover, it is also available at a valuation that is slightly below historical norms.  The company has provided a stable and growing dividend since it went public in 1999.  However, the company did keep their dividend the same for fiscal years 2001 and 2002, but they did not cut it.  Additionally, 2008 included five dividend payments due to a change in their dividend payment schedule.  Nevertheless, their dividend growth rate since 1999 has averaged 13% per annum, but the dividend growth rate has slowed somewhat to 8.2% per annum since 2013.

United Parcel Service Inc. carries an A+ credit rating from S&P but does have a debt to capital ratio of 75% – which I consider a concern.  However, the company generates significant revenues and produces ample cash flows to service and eventually retire its debt.  Moreover, a significant portion of their debt is long-term, which does moderately alleviate my concerns.  But more importantly, the debt they have recently taken on was used to fund numerous acquisitions since 2014 and to expand international services significantly.  I see the latter as a huge opportunity that should bear fruit over the longer run.

United Parcel Service Inc.: Meeting Specific Well-Defined Objectives

A lot of people take a rather simplistic view of investing.  To their way of thinking, investing is always about where they think they can make the most money.  However, attempting to make maximum returns often comes with taking on excessive levels of risk.  The old adage “no risk no gain” seems to be their mantra.  To these people, a common objective is: am I beating the market and by how much?  However, I see the investing process as much more nuanced.

Just like apparel, investments come in all shapes, sizes and colors.  Some are conservative – and maybe even boring or drab.  Others are very flashy, colorful and even risqué.  Each will appeal to a different personality type.  There are some people who would not be caught dead in flashy clothing, and others that would wear nothing else.  To this extent, it’s a matter of taste.  Nevertheless, the pertinent element is to be comfortable with your choice.

Being comfortable with your choices is critically important as it relates to investments, especially common stock investments.  The key is to choose investments that are capable of meeting your unique goals, objectives and risk tolerances.  In all honesty, there was a time when maximum growth was my primary goal.  Therefore, I looked for stocks that I believed presented the best opportunity to grow my capital at above-average rates.  I recognized the risk associated, and also understood that the fastest-growing companies rarely offered a dividend.

However, my goals and objectives have changed significantly in more recent years.  Today, I am more concerned with preservation of capital, and more focused on having my investments supplement my income.  Consequently, my personal focus has turned more towards dividend growth stocks than to pure non-dividend paying growth stocks.  Additionally, I consider each dividend payment as much a return of my capital as it is a return on my capital.  In other words, with each installment of dividends I consider that my total capital at risk is essentially reduced.

Furthermore, my current investment objectives are even more focused than just choosing a different type of equity.  I also have specific income objectives in mind as well.  However, my income objectives are not arbitrary.  Instead, they are based on what I consider realistic assessments of what level of income is prudently available from high-quality dividend growth stocks.  Moreover, my objectives are not solely about current yield.  I also insist on what I call growth yield.  In other words, I am specifically looking for dividend growth stocks that I am confident will provide me an increase in income with each passing year.

But perhaps most importantly, these income objectives are clearly measurable, and not subject to stock price volatility.  My dividends are paid on the amount of shares I own, and once purchased, that number is fixed.  Therefore, instead of worrying about how much the price of my stock has gone up or down today, I am solely focused on what the dividend per share is and whether it will increase or not in time.  I find this to be a very calming influence.  Instead of worrying about the market, I take great pleasure and even comfort in depositing those dividend checks as they come in each quarter.

At the present time, given the realities of interest rate levels, my specific yield targets are well defined.  Currently, I am looking for conservative stocks with a current yield of 3% or better.  However, I would tend to eschew most stocks that offered current yields significantly above 5% due to the associated risk.  On the other hand, I might sparingly include a few higher-yielding REITs in my overall portfolio.  This also gives the opportunity to blend a faster growing but lower growing dividend growth stock into the mix.  This blending would allow me to hit my 3% current yield target while simultaneously providing some additional growth of capital.

Investment thesis: UPS

UPS is clearly the 800 pound gorilla of the global parcel shipment business.  The company has established a worldwide infrastructure distribution network and they continue to invest heavily to expand their international presence.  According to Morningstar, UPS invests $1 billion per year in IT which represents almost a 3rd of its capital expenditure budget.  This is important because of the growing demand of B2C (business to consumer) which offers lower margins and greater distribution challenges than B2B (business to business) shipments.  However, UPS is keenly aware of both the challenges and the opportunities from B2C deliveries.  The following slide from their most recent presentation illustrates their awareness as well as their efforts towards a solution:

United Parcel Service

Part of the reason I bring this up is because there are many investors that are concerned that Amazon may be a disruptor longer-term.  However, I believe those concerns are overblown.  Amazon may develop their own internal distribution network, but I do not believe they are willing or capable of duplicating UPS’s massive worldwide distribution network and infrastructure.  Moreover, there are thousands of large businesses and millions of small ones that will continue to utilize UPS and its competitors.  More importantly, UPS believes that online retail is the growth engine of the future and they are transforming their business model to capture their fair share this opportunity as indicated below:

United Parcel Service

Additional evidence of their recognition of this opportunity as well as their strategy to capture their fair share is their announced implementation of Saturday ground service to half the US in 2017.  This is forecast to boost their asset utilization and capacity.  However, it will also require additional investment on their part.

United Parcel Service

Morningstar also awards UPS a wide moat based on their scale, cost advantages and large network.  Morningstar contends that replicating UPS’s assets would be beyond the capacity of any competitor.  This also contributes to Morningstar’s belief that UPS will out-earn its cost of

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