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At 52-Week Highs, Will FedEx & UPS Continue to Rally in 2018?

Zacks

The biggest overhaul in U.S. tax code in 30 years has been a boon for package delivery giants like FedEx Corp. FDX and United Parcel Service UPS. The $1.5 trillion package, converted into law (Tax Cut and Jobs Act) on Dec 22, reduces corporate taxes from 35% to 21%. The significant reduction in corporate tax rate is likely to aid the above-mentioned companies. We note that the effective tax rate at FedEx was 35.4% in the first half of fiscal 2018.

Riding on this momentum, shares of FedEx and UPS that dominate and define the Zacks Air Freight and Cargo Industry, hit their respective 52-week high levels on Jan 3, 2018. While FedEx shares scaled a 52-week high of $261.57 during the trading session, the UPS stock touched its highest point of $126.69.

Apart from the significant drop in corporate tax rate, the new law allows these companies to deduct their capital expenditures from taxable income in the year of their occurrence, which was not allowed earlier. This aspect hugely favors companies like FedEx and UPS as they invest substantially toward capital expenditure.

Naturally, their tax bills for the year would be lowered significantly due to higher deductions. This, in turn, will leave more cash in the hands of these companies to fund their capital expenditures, acquisitions and share repurchases, among others.


Holiday Season – Another Catalyst

The holiday season every year presents a big opportunity to companies like FedEx and UPS to boost their revenues. It is normally considered a busy period for such companies as shipping volumes tend to surge.

As is the case every year, the companies left no stone unturned to shine brightly in the most recent holiday season. To meet the surge in demand, FedEx hired more than 50,000 seasonal workers this time. Meanwhile, UPS hired around 95,000 seasonal workers.

In fact, according to Reuters report both these Zacks Rank #3 (Hold) companies had a highly successful holiday season buoyed by strong e-commerce growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dividends/Buybacks Attest Solid Financial Health

Financial prosperity of FedEx and UPS is reflected in the fact that both the companies have hiked their respective dividend payouts in 2017. In February, UPS raised its quarterly dividend by 6.4% to 83 cents per share ($3.32 on an annualized basis).

During the first nine months of the year, the company paid approximately $2.1 billion as dividend to shareholders. It also bought back bought back 12.3 million shares for about $1.4 billion in the same period.

FedEx hiked its quarterly dividend by 25% to 50 cents a share (or $2 annually) in June. Needless to say, as investors prefer an income generating stock, a high dividend paying one is much coveted. To this end, investors are always on the lookout for companies that have a track record of consistent and incremental dividend payments.

Price Performance

Shares of both UPS and FedEx have outperformed the S&P 500 Index in the last six months. While, UPS has gained 14.3%, FedEx has rallied 20%. The S&P 500 Index has gained only 8% in the same period.


Will the Rally Continue in 2018?

With the tax-bill becoming a law in the final month of 2017, stocks like FedEx and UPS are likely to be huge beneficiaries in 2018. The new tax law is likely to boost their share prices further in the current year.

FedEx has already stated that the new tax regime is expected to boost fiscal 2018 (ending May 31, 2018) earnings per share in the range of $4.40 to $5.50 (before mark-to-market year end pension accounting adjustments, primarily due to the revaluation of the company’s net deferred tax liabilities).

Furthermore, FedEx and UPS are likely to continue with their shareholder-friendly activities in 2018 due to the new tax law. Therefore, a hike in dividends from both the companies can be anticipated in the year.

In fact, the new tax regime is a positive for not only these two companies but the other transportation players as well. Evidently, Southwest Airlines LUV and American Airlines Group AAL announced bonuses worth $1,000 per employee, following the tax overhaul.

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