UPS (NYSE: UPS)is a profitable company threatened by its principal customer Amazon (NASDAQ: AMZN).
Notably, UPS (NYSE: UPS) reports a gross profit of $16.14 billion on revenues of $17.444 billion for 3rd Quarter 2018. Additionally, Stockrow reports UPS’s revenues were growing at a rate of 7.86% during 3rd Quarter 2018.
Moreover, Stockrow records an operating income of $1.727 billion and a net income of $1.508 billion for UPS in 3rd Quarter 2018. Hence, UPS’s core business is making a lot of money.
Is UPS (UPS) a Cash-Rich Company?
Obviously, a lot of observers will wonder if UPS is a cash rich company. The answer is yes, UPS (UPS) is a cash rich company.
For example, UPS records an operating cash flow of $2.222 billion and a free cash flow of $591 million for 3rd Quarter 2018. Beyond that, UPS reported $4.097 billion in cash and equivalents and $744 million in short-term investments on 30 September 2018.
Therefore, UPS had $4.841 billion in cash at the end of September 2018. Thus, UPS is a cash-rich company.
Why Amazon Prime is Good News and Bad News for UPS (NYSE: UPS)
Amazon Prime is good news for UPS (UPS) because there were 95 million Prime members in the US in June 2018. Hence there were 95 million potential customers for UPS delivery through Prime.
Importantly, Prime is growing dramatically particularly in America. In fact, there were 85 million Prime members in June 2017 and 95 million in June 2018, Statista calculates. Thus Prime gained 10 million new members; and UPS gained 10 million potential delivery customers, in one year.
However, some of the fastest Prime growth is in services UPS does not deliver. For example, Amazon estimates Prime members ordered two billion products for one-day or faster delivery in 2018.
In addition, Amazon is becoming a major player in groceries. In fact, Amazon’s Best of Prime claims subscribers bought enough organic apples to bake 350,000 Apple Pies.
Furthermore, Amazon Prime is now delivery some orders in Los Angeles, North Carolina, and Washington State in less than 10 minutes. Thus, Amazon’s delivery focus is moving away from traditional carriers like UPS.
Amazon is Moving Away from UPS (NYSE: UPS)
Amazon is taking serious steps to move away from carriers like UPS. For example, Amazon is hiring delivery drivers in Michigan and Ohio, Fortune reports.
The drivers will work for a new subsidiary called Shipping by Amazon that will compete directly with UPS. Notably, Amazon is purchasing 20,000 Mercedes-Benz Sprinter vans from Daimler AG for Shipping by Amazon, Automotive News claims.
In fact, Amazon is providing discounts on fuel, vehicles, insurance, and uniforms to contractors in its Delivery Partner Program. The Delivery Partners will operate the vans, hire the drivers, and deliver the goods.
Therefore, Amazon is trying to create hundreds of competitors for UPS all over the United States. Shipping by Amazon should scare UPS (UPS) because the Everything Store has the resources to achieve that goal.
How Shipping by Amazon Threatens UPS (NYSE: UPS)
For instance, Amazon records $20.425 billion in cash and equivalents and $9.34 billion in short-term investments for 3rd Quarter 2018. Thus, Amazon had access to $29.765 billion in cash on 30 September 2018.
Under those circumstances, Amazon can hire thousands of drivers and buy thousands of vans almost instantly. However, it is not clear whether Amazon has the logistics or management expertise to coordinate those delivery efforts.
I think Shipping by Amazon could quickly become a major debacle if they roll it out too fast. In particular, I think both Amazon and the contractors lack the expertise to organize and deploy delivers on the scale Amazon needs.
Given that reality, I think it will be several years before Shipping by Amazon poses a serious challenge to UPS (UPS) or FedEx (NYSE: FDX). It will take Amazon several years to build and deploy the infrastructure needed to making Shipping by Amazon work.
UPS (NYSE: UPS) Will Make Money for the Foreseeable Future
Therefore, UPS (NYSE: UPS) will make money for the foreseeable future and move a large percentage of Amazon packages for a long time.
Moreover, there are outside factors that can help UPS including other online retailers and antitrust legislation. For instance, eMarketer estimates one online retailer Wayfair (NYSE: W) grew at a rate of 40.1% in 3rd Quarter 2018.
However, Wayfair’s 2017 sales of $3.39 billion were still a fraction of Amazon’s $52.8 billion. Additionally, Walmart’s online sales were growing at a rate of 39.4% in 3rd Quarter 2018. However, Walmart (NYSE: WMT) has just 4% of US online sales, eMarketer estimates.
Antitrust concerns can help UPS (NYSE: UPS) because there will be strong pressure for Uncle Sam to keep Amazon out of businesses like shipping. In particular, the Teamsters’ Union is likely to pressure both Democrats and Republicans to block Amazon’s expansion into shipping. The Teamsters will oppose Shipping by Amazon because UPS is one of their largest companies.
Moreover, President Donald J. Trump (R-New York) is likely to take action against Amazon as the 2020 Presidential election approaches. However, only time will tell if such pressures lead to effective political or regulatory actions.
The UPS (NYSE: UPS) Dividend is safe from Amazon for now
Under these conditions, the UPS dividend is safe from Amazon for now. That is good news for UPS shareholders who received 91¢ on 5 December 2018.
To add icing to the cake the UPS dividend is growing dramatically. For instance UPS paid a dividend of 83¢ on 29 November 2017. Therefore, the UPS dividend grew by 8¢ in 2018.
The data about the UPS dividend is superb. For instance, UPS shareholders were receiving a dividend yield of 3.16%, an annualized payout of $3.64 and a payout ratio of 50.2%, on December 3, 2018. Moreover, those shareholders are enjoying their eighth straight year of dividend growth.
UPS (NYSE: UPS) is a value investment for the age of Amazon
I think UPS is a value investment for the age of Amazon because of the dividend and the share price. Particularly, the $105.90 share price reported on 6 December 2018 is a great deal for value investors.
If you need a long-term income stock for the age of Amazon UPS is a great choice. Amazon and its competitors will need UPS’s services for years to come. Thus, UPS shareholders will enjoy a great dividend for years to come.