UPS: Can We Hire These Guys to Run the Post Office? (The Stock's Worth a Look, Too)

Sometimes researching a particular company, in this case United Parcel Service (UPS), leaves one ambivalent about the individual stock but newly optimistic about investing in the private sector generally. If a 106-year-old company, employing some 400,000 people (about 250,000 of them Teamsters), can be the model of productivity, collaboration and far-sightedness that UPS is, just imagine what’s possible at smaller and newer enterprises.

Or in the public sector. UPS (let’s not say “suffers from” because it actually deals with its problems) shares many of the challenges our federal, state and local governments do: a unionized workforce, huge pension and healthcare obligations, a need to invest in infrastructure projects, and exposure to global economic ups and downs. Seeing UPS’s steady progress and gritty decisions in some of these areas, one wishes our elected officials and bureaucrats could be dispatched to UPS headquarters in Atlanta, or to one of its hundreds of operating facilities, and serve as interns. We might be better off. The company is everything the U.S. Postal Service isn’t.

Really, few companies better reflect what’s going on in the economy more completely than UPS. Amazon (AMZN) shipments, like consumer spending – they’re up. Business-to-business shipments, like industrial investment – not so much.

UPS stock, by the way, might be a tad pricey right now and the company’s near-term growth is uncertain given the difficult times in Europe and slowed growth in China. And of course the U.S. economy isn’t a house on fire, either. But UPS stock has a dividend yield of about 3%, and more importantly it has a strong record of lifting the payout regularly and meaningfully, including a 10% increase last February and an 11% hike the prior year.

UPS Dividend Chart

UPS Dividend data by YCharts

The shares look a bit pricey in part because a big one-time charge in the third quarter depressed profits and thus pushed up the trailing 12 months PE ratio. Better to look at price-to-sales perhaps.

UPS Price / Sales Ratio TTM Chart

UPS Price / Sales Ratio TTM data by YCharts

But enough about the stock. It’s a great company and will probably grow and prosper in the years ahead and finding a good entry point to own some isn’t a bad idea. The way to fall in love with the stock is to appreciate the company itself.

First off, badmouth organized labor all you want, but the UPS experience suggests that the problem elsewhere might be disorganized management. With those quarter million Teamsters, and unionized pilots and mechanics, too, UPS is a productivity machine. It’s installing a system called telematics in its fleet of 100,000 or so trucks that captures data on more than 200 operating variables. Speed, oil pressure, seat belt use, idling time, number of times the truck shifted into reverse; UPS uses the data to improve fuel efficiency and driving patterns to reduce costs and save time.

Like this: in 2011, as revenue rose 7%, to $53.1 billion, UPS managed a 0.8% reduction in labor hours in its domestic package delivery business and a similar reduction in miles driven.

You don’t get those kinds of efficiencies, year-in and year-out, if you have poor relations with employees, and UPS strives for a collaborative workplace, far closer to the German model than most U.S. companies and worth considering especially where wage-and-productivity challenges – manufacturing, say – have sent formerly good-paying jobs aboard. Five out of six of its roughly 86,000 drivers (a coveted blue collar job that can pay $75,000 a year, with good benefits) come from the ranks of its more than 100,000 part-time workers who load and unload trucks and sort boxes. Upward mobility. UPS promotes from within and many of its top executives spent time on the loading dock and driving trucks. And in the realm of public spiritedness, UPS workers are the biggest contributor to United Way campaigns. UPS’s effective tax rate of about 35% is probably the lowest it can manage, but its image as a corporate citizen gains from the fact it hasn’t figured out how to weasel out of most taxes.

UPS, despite uncertain economic times, is investing aggressively to grow, plunking down $1 billion to expand its giant Lousville, Ky., air-and-logistics hub and $200 million to expand its European air hub in Cologne, Germany. The two facilities can process 416,000 and 190,000 packages an hour, respectively. Capital spending runs about $2 billion a year, and UPS has an enviable return on invested capital, here making FedEx (FDX) and General Electric (GE) look slow-footed.

UPS Return on Invested Capital Chart

UPS Return on Invested Capital data by YCharts

No “bridges to nowhere” here.

Finally, the company is meeting some of its thorniest problems head-on. It has unloaded fuel-guzzling airplanes, replacing them with shiny new ones that sip fuel. It has massive pension and retiree health obligations, and by gosh they’re well funded (no effort to weasel out of an obligation here, either). Its separate participation in multi-employer pension and benefit funds subjects UPS to the risk that other employers in the funds don’t make good on their obligations, so UPS is slowly, dauntingly trying to limit that exposure; the $896 million charge in the third quarter was to buy its way out of the New England Teamsters and Trucking Industry Pension Fund, shifting covered workers into a new fund less exposed to the problems at Joe’s Trucking.

Analysts, by the way, expect a 7% or so revenue increase at UPS in 2013 (it reports fourth-quarter 2012 results at the end of this month), and given the leverage in an operation with enormous fixed costs but the capacity to handle lots more packages, profit should rise more swiftly than that.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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