This Stock Continues to Deliver Dividend Growth

It’s a bit early to determine the winners and losers this holiday season, but two of the obvious choices are UPS (NYSE: UPS) and FedEx (NYSE: FDX).

Record online retail shipments should help both companies, but FedEx, blaming the weather among other things, ran into significant problems getting packages delivered on time. UPS didn’t have those issues and 98% of its packages arrived on time.

But is UPS’ dividend as reliable as its delivery services? Let’s see what brown can do for you as a dividend growth investor.

[ad#Google Adsense 336×280-IA]The company pays a nearly 3% dividend yield and has raised its dividend 15 times in the past 16 years, including every year since 2010.

In 2015, Wall Street estimates the company will generate $4.78 billion in free cash flow.

It will pay out about $2.64 billion in dividends for a payout ratio of 55%, well within my comfort zone.

I usually want to see 75% or less of free cash flow paid out to shareholders in the form of dividends.

That way if the company has a rough year or two, the dividend will not be in jeopardy.

Paying out just over half of its cash flow, UPS has plenty of room to raise the dividend again even if cash flow were to decline.

The good news is cash flow is not expected to fall. In fact, Wall Street forecasts free cash flow will grow a healthy 14.6% next year, which should fuel another increase in the dividend.

In the past 10 years, the company has not once cut the dividend – even during the Great Recession.

The only reason the company does not get the Safety Net’s highest rating is free cash flow fell last year, resulting in negative one- and three-year growth. The decline in cash flow was caused by several factors, including a sharp bump higher in selling, general and administrative expenses. Capital expenditures (capex) also grew nearly 13% last year, which put further pressure on free cash flow.

Capex, though higher in 2015, is expected to be flat in 2016.

If revenue and earnings grow as anticipated, free cash flow should have no problem climbing along with them.

And if FedEx loses customers based on its poor performance this holiday season, UPS is likely to be the beneficiary.

Now, there has been some chatter that UPS’ largest customer, Amazon.com (Nasdaq: AMZN), is considering delivering its own packages, which would take a big bite out of UPS’ revenue.

If anyone can do it, it’s Amazon, but that is not a small undertaking and it won’t happen tomorrow.

Should Amazon reduce its reliance on UPS, I would have to reconsider the safety of the dividend, but until then, UPS’ dividend is safe.

Dividend Safety Rating: B

Good investing,

Marc

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Source: Wealthy Retirement