Should Investors Pick FedEx or UPS?

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U.S. freight companies are commonly viewed as bellwethers for our economy, because the volumes of packages and goods they transport are seen as indicators for the health of corporate and personal spending.

Curiously, the global economy continues its steady recovery from the depths of the Great Recession, yet FedEx (NYSE: FDX) has underperformed this year both in terms of its stock price and underlying operations. At this point, the question to investors is: Does this stock still have a package full of profits waiting for your portfolio?

All is not very well

The S&P 500 Index is up about 14% to begin 2013, yet FedEx is only up approximately 6%. This shouldn’t be a surprise, since FedEx has not had great things to say about the state of its business in its recent quarterly reports.

FedEx shares fell 7% on the day the company issued its fiscal third-quarter results, which were as ugly as its stock price performance. FedEx announced that third quarter diluted earnings per share fell almost 21% compared with the same period one year ago. FedEx chairman, president, and Chief Executive Officer Frederick Smith blamed the poor results on continued weakness in international air freight, as well as the company’s clients selecting slower, cheaper delivery services.

Moreover, the company’s recent dividend increase left a lot to be desired. Dividend changes are one of the best clues into the underlying health of a business. Earnings can be massaged and managed, but dividend payments are made in cash. There’s no faking dividend policy, and a company that increases (or fails to increase) its dividend at a healthy level is subtly providing investors real signals about how its business is doing.

That’s why when FedEx increased its quarterly dividend by just one cent per share, income investors had to be disappointed. Prior to the increase, FedEx yielded just one half of one percent annualized. That’s a pitiful yield, and the company needed to provide a sizable bump to its payout to even be considered a dividend play.

For investors who are looking for more meaningful payouts, you should consider industry giant United Parcel Service (NYSE: UPS). Not only does UPS have a much more significant yield, at nearly 3% annualized at recent prices, but the company’s underlying performance is measurably better than FedEx’s in recent quarters.

UPS saw 3.5% revenue growth in 2012, then followed with 2% revenue growth in the first quarter of 2013. Moreover, UPS realized 8% growth in diluted earnings per share in the first quarter, year over year.

This duopoly has a clear winner

The freight services industry in the United States is essentially a duopoly, with FedEx and UPS the major players dominating the industry. While at first glance, investors might consider these two to be equals, that would be a mistake.

Frankly, UPS has a lot more to offer investors, namely stronger financial performance and a healthy 3% dividend that puts it squarely in the group of blue-chip dividend payers.

FedEx needed to double its dividend (or more) for anybody to seriously consider it a strong dividend stock. That didn’t happen, unfortunately, and as a result FedEx yields just 0.6% including its dividend increase. At this point, that low of a yield makes me ask the question, why even bother? FedEx clearly isn’t serious about being a strong dividend payer, so what good does 0.6% do for shareholders?

Institutional income investors surely aren’t going to rush to buy the stock just because it yields a puny 60 basis points. FedEx would be better off not paying a dividend and focusing its efforts on getting its business back on track.

As a result, investors looking for a healthy dividend yield and firmer performance in an otherwise shaky global economic recovery should prefer UPS to its rival FedEx.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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