Ask the Rational Investor: A New Driver at UPS
There is a new boss in the top job at UPS. Furthermore, the new boss does not look to be the same as the old boss. Could this be the boost the company needs to get its stock moving in the right direction?
Since 2001, Carol Tomé, Home Depot’s former Chief Financial Officer, has been regarded as one of the most successful women in corporate America. Under her watchful financial eye, Home Depot grew its store base from 400 to 2,200 and spearheaded many of the innovative initiatives (e.g., eCommerce investments, supply chain improvements, etc.) that put Home Depot leaps and bounds ahead of the competition. It is no wonder this led to a 450% appreciation in the stock price over the period.
After a brief retirement from Home Depot, United Parcel Service (UPS) announced that Tomé would take over as Chief Executive Officer (CEO) starting in June 2020. Given her outstanding track record and her long tenure as a UPS board member, investors were quick to bid up the share price in anticipation of good things to come.
It also doesn’t hurt that Tomé isn’t exactly starting from scratch. As a bit of background, UPS was founded in 1907 and is the world’s largest package delivery company, delivering almost 22 million packages per day, or a total of 5.5 billion per year in over 220 countries!
Coronavirus has accelerated many trends such as remote work, but also eCommerce shopping and the importance of quick delivery. In the most recent quarterly results from UPS, domestic “business to consumer” volumes increased by 65% due to eCommerce.
Investors are attracted to the oligopoly market structure of package delivery, where competitors with large market share act independently but rationally in determining prices. This usually leads to attractive profit margins. In the case of UPS, this dynamic has resulted in a lot of cash flow and a healthy dividend yield, but the stock price underperformed the S&P 500 from 2014 to 2019 due to large capital improvements to handle larger volumes.
Ms. Tomé has already outlined several changes she plans to make across the company to improve efficiency and profitability over the long-term. Among these include price hikes set to take effect this holiday season to better offset the financial demands of growing eCommerce delivery volumes. This should allow for better servicing of customers and greater financial flexibility moving forward. Since the announcement, FedEx has followed with its own price adjustments for the 2020 season.
Despite the stock price run-up, UPS offers investors a highly-attractive dividend yield of 2.5% and the optionality of a turnaround.
Sources: Home Depot and UPS company reports
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.