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Will UPS Help You Retire Rich?

Thursday - 3/21/2013, 1:03pm  ET

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether United Parcel Service makes a great retirement-oriented stock.

UPS doesn't make anything, but as the leading shipping and logistics company, it counts on other businesses and individuals sending their products around the world. Given its status as a barometer of overall economic activity, how has UPS handled the rocky conditions we've seen lately around the world? Below, we'll revisit how UPS does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at UPS.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$79.5 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.89

Pass

 

Worst loss in past five years no greater than 20%

(19.7%)

Pass

Valuation

Normalized P/E < 18

135.01

Fail

Dividends

Current yield > 2%

3.0%

Pass

 

5-year dividend growth > 10%

6.3%

Fail

 

Streak of dividend increases >= 10 years

4 years

Fail

 

Payout ratio < 75%

263.9%

Fail

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at UPS last year, the company has lost a point, as the company's payout ratio went through the roof as a result of falling earnings. The stock hasn't done that badly, but it's only managed to gain about 5% over the past year.

UPS's earnings are a bit misleading because of the impact of a huge $3 billion charge that it took in connection to its pension obligations. When you exclude that impact, concerns about its ability to finance its dividend pretty much disappear. With strength from shipping partners Amazon.com and eBay, UPS has enjoyed the corresponding boost in consumer shipping volume.

Nevertheless, UPS is far from being in the clear. Just yesterday, rival FedEx saw its shares take a 7% hit as the delivery giant said it would reduce its flight schedule to and from Asia. With customers looking to economize on shipping, FedEx has had to focus on cutting its own costs, and UPS will need to counter with its own cost-saving moves in order to keep its competitive edge.

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