When you need to send a package, you often choose between FedEx and United Parcel Services. These two companies compete very hard to be the carrier of choice for their customers and this can be accurately reflected in the stock price performance of their shares.
Many critics have regarded the 2 giants of the shipping and logistics sector as relatively safe investments. FedEx and UPS make it their business to ship whatever you want, wherever you want, and they continue to make strides toward getting it there whenever you want as well. With a combined US domestic market share falling just under 80%, there’s a huge barrier to entry in the shipping industry.
Amazon: A Real Threat?
In recent years, Amazon has become another key player in the market after announcing they will take over some of their own logistics operations. With the rise of internet shopping and growth in Amazon, it is likely they will continue to expand to the shipping and logistics industry. However, Amazon currently makes up 7% of UPS's North American business and 3% of FedEx's so it does not pose a risk in stealing significant market share.
The US delivery sector is a comfortable duopoly between UPS and FedEx.
So, who is crowned the king of the couriers? FedEx or UPS? Let’s compare and see.
UPS, is almost two times the size of FedEx in terms of market cap but FedEx stock has appreciated at a much larger rate than the UPS ticker since 2000. FedEx is perceived as having higher growth opportunity – a perception that is proven yearly by its astounding compound annual growth rate of 9.6%. FedEx takes take the cake in terms of historic growth. But with the companies ties to the performance of a cyclical American economy, the question for many investors is whether UPS and FedEx have what it takes to continue benefitting shareholders, and beating the market going forward.
UPS and FedEx have different dividend philosophies. UPS pays out slightly more than half of its earnings every quarter as dividends. It also has a better track record of dividend growth, increasing its quarterly payouts by 5% to 10% per year since the end of the 2008 financial crisis. FedEx on the other hand, has paid out 12.07% of earnings as dividend over the past 5 years, choosing to reinvest the remaining capital. Also, it's only recently that FedEx took dividend growth particularly seriously, making penny-per-share increases in its quarterly dividend until 2014.
UPS has paid 2.75% of the stock price back to investors annually as dividends over the past 5 years. In comparison, FedEx has only paid 0.51% of the stock price.
Overall, United Parcel Service takes the edge over FedEx on the dividend front.
Who has the competitive advantage?
Both UPS and FedEx have excellent gross profit margins. Their ability to create profit from sales reflects their competitive advantage in the shipping and logistics industry. UPS and FedEx have excellent pricing power and can raise their service prices to increase their profitability.
However, UPS once again edges out FedEx in the competitive atmosphere with a gross profit margin of 75% in the last 5 years as opposed to FedEx’s 63%.
Return on Equity:
The return on equity (ROE) is an extremely useful metric that measures how well the management at UPS and FedEx is investing shareholders' money and the extent to which it is creating or destroying value.
Over the past 5 years, UPS has generated excellent profit with the money shareholders have invested with a 95% ROE. Although this seems unstable, UPS has stood the test of time in providing a solid return on equity. Since the 2008 financial crisis, ROE has been 85%. In comparison FedEx had a ROE of 11% in the last 5 years.
UPS management does a much better job than FedEx to create value and increase net profit.
Overall, both FedEx and UPS have many opportunities and risks that lie ahead, and it's hard to pick an obvious favorite. For dividend investors looking to make income now, UPS is the clear choice. However, for those with time and patience who are looking to hold for retirement, the continued future growth of FedEx looks very promising.
Disclaimer: *I am not a financial advisor, please contact one before making any trading decisions of your own. This piece serves as my personal opinion and should not be taken on the basis of a recommendation of trading strategy. *