On a lethargic day in terms of market action on Monday, the day’s biggest news arrived in the after-hours session when FedEx (FDX) boosted its profit guidance for the current quarter to $1.10 a share from 65-95 cents a share. FedEx cited increased demand for its international and ground shipping services as the catalyst for the robust quarter. Throw in the fact that the holiday shopping season is usually the busiest time of year for FedEx and its chief rival UPS (UPS) and it may be time to take a look at adding one of these stocks to your portfolio.
We’ve previously looked at stocks and ETFs that benefit during economic recoveries. FedEx and UPS are two names that are intimately tied to the overall health of the U.S. and global economies. Since these two companies face little in the way of additional domestic competition and do essentially the same thing, investors should only own one of these names. So it’s decision time. Which package shipper belongs in your portfolio? In spite of the cheery news delivered by FedEx, UPS is probably the better bet for longer-term investors.
Never mind that UPS is about twice as big as FedEx in terms of market cap. UPS typically trades at a premium to FedEx, but take a look at the forward P/E ratios. UPS is currently trading at a discount to its biggest rival. UPS is also the superior dividend play, both in dollar and yield terms. While UPS pays an annual dividend of $1.80 a share good for a yield of 3.1%, FedEx pays just 44 cents for a yield of 0.5%. UPS has increased its dividend at an annualized rate of about 13% over the last five years. Considering that dividends account for a significant chunk of a portfolio’s returns over time, a higher yield and payout are something to behold.
Yes, FedEx shares have far outperformed UPS on a year-to-date basis. FDX has gained around 39% compared to about 8% for UPS. So while it may easy to view UPS as a laggard, the other side of that coin is that this supposed laggard may also be poised to deliver some opportunity for astute investors. Consider this anecdote. FedEx hired 35,000 seasonal workers to help with the holiday shipping rush. UPS hired 50,000. That should not be used as a deciding factor about which stock to buy, but it does highlight the fact that FedEx is expecting big things for investors. UPS shareholders could be beneficiaries of the same good news.
UPS was the first of the two companies to announce that it is raising shipping rates for 2010. The Street’s reaction to the news has been favorable. The bottom line is FedEx is getting all the good press these days and most investors seem to prefer the stock over UPS. That’s fine. But ignoring the power of the UPS dividend and the company’s value stock status could prove to be a mistake that smart investors won’t want to make. At the least, FDX and UPS performance bodes well for the economy during this holiday season.
Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.