United Parcel Service

From bicycle courier to global corporation

In just a few days it'll finally happen: my asset-managing GmbH, the DividendeOhneEnde Beteiligungen GmbH to be precise, will be officially founded, and I can gradually start building my new portfolio. While planning my portfolio, I asked myself how many stocks I want to invest in. Naturally, there are different views on this: I think that 1 to 2 ETFs are completely enough for most people. Those who are more the individual-stock type can put together a decent portfolio with 20 to 30 stocks. For my part, though, I've ended up with over 100 stocks that I want to invest in bit by bit. Stocks are my passion, so why should I limit myself? In my members' area you can easily track which stocks I buy and whether or not my portfolio beats the MSCI World and S&P 500 indices.

One company that achieved an extraordinary outperformance over the past year is the world's largest parcel carrier, United Parcel Service (UPS). Today let's take a look at how the company went from a small bicycle courier to a global corporation and what its future prospects look like.

The history and business model of United Parcel Service Inc.

The story of today's logistics giant begins on March 29, 1888, when James Emmett Casey was born near Candelaria (Nevada) as the son of Irish immigrants. When he was 9, the family moved to Seattle, hoping for better prospects there. Unfortunately, this plan didn't work out, and Jim, as he was usually called, dropped out of school at the age of 11 to support his family financially. From then on he worked as a delivery boy - first for a department store, then for a small tea shop, where he earned 5 dollars a week. In no time he learned the city's streets, alleys and house numbers inside out. To be able to go back to school, he quit and took a lower-paying night-shift job at American District Telegraph, where he made friends with his later business partner Claude Ryan. From 7 p.m. to 7 a.m., Jim ran errands and delivered messages to customers - and went straight to school afterwards. When Jim's father died in 1902, he had to drop out of school for good and urgently come up with something to provide for his family.

After two failed ventures, he founded the American Messenger Company together with Claude Ryan on August 28, 1907. With a loan of 100 dollars, the two bought two telephones and two bicycles and hired six messenger boys. They distributed flyers all over Seattle listing their services, their prices and their phone number. They did get plenty of jobs, but they were very varied - from regular errands, to minding small shops while their owners had lunch, to walking dogs. Accordingly, these jobs were hard to plan. For this reason, the two founders decided to focus on commercial customers, for whom they had to deliver goods on a continuous basis. Thanks to the steady orders, the young company grew and soon was able to move into a larger office and open a second branch. Furthermore, in 1913 it merged with its competitor, the Motorcycle Delivery Company, and was now called Merchants Parcel Delivery. After only two years, it became the largest parcel carrier in the city. But Jim was far from satisfied with that.

He had big plans and now expanded to other cities as well - often by buying up smaller delivery companies. Since the name Merchants Parcel was already taken near San Francisco, they looked for a new one and eventually came up with United Parcel Service. Around this time they also began always sending their delivery drivers on the same route. This had two advantages: the drivers got to know the route better, and customers always dealt with the same employees. Unlike its numerous competitors, UPS now also refused packages that were either too large or too heavy. As a result, UPS became more and more efficient and profitable, while the other parcel carriers had to struggle with the heavy and bulky packages. Business developed excellently, and in 1999 the company went public. With over 543,000 employees in more than 220 countries and territories, the United Parcel Service Inc. is today one of the largest and most successful logistics companies in the world.

How can United Parcel Service's business develop in the future?

First, I'd like to take a look at the figures for the most recently published quarter (Q2 2021 - ended June 30, 2021). Total revenue for the period April to June 2021 was a solid 23.4 billion US dollars, an increase of 14.5 percent over the prior-year quarter. The parcel carrier's profit amounted to 3.3 billion US dollars, a breathtaking 47.3 percent increase over the second quarter of 2020. Excluding special items, UPS thus earned 3.05 USD per share in this period - undoubtedly a great quarterly result, driven mainly by e-commerce deliveries, air freight and the temperature-controlled handling of healthcare products such as the Covid-19 vaccines.

But then why has the stock come under so much pressure in recent days?

Well, UPS did impress with all its figures, but since the quarterly report on July 27, the stock has fallen by about 10 percent. This is mainly due to declining volume in the US business. Since the beginning of the pandemic, UPS has seen incredible growth, above all thanks to the exploding demand for e-commerce orders. Little by little the economy is now reopening, and order volume in the USA fell by about 4 percent. And since the logistics company earns over 63 percent of its revenue in its home country of America, this news didn't go down well with investors. Nevertheless, I believe that UPS is on an exceptionally good path, still has a lot of growth potential ahead of it, and that long-term-oriented investors should use the opportunity to buy in or to add to their position.

What about the dividend?

UPS investors have received a share of the company's profits in the form of dividends since the IPO in 1999. Although the parcel carrier couldn't raise its dividend in 2002 and 2009, it has never had to cut it. Over the last 10 years, the average annual dividend increase is an acceptable 7.3 percent. Despite the strong price rise over the past year or so, the current dividend yield is a solid 2.2 percent. Only the payout ratio of 57.8 percent could be a bit lower in my eyes.

Conclusion:
The logistics group United Parcel Service has a long and exciting history behind it and undoubtedly a future full of opportunities ahead of it. Driven by the coronavirus pandemic, e-commerce is growing significantly faster still - which UPS is perfectly placed to benefit from. Long-term investors should definitely add this stock to their watchlist.