A Low-Yield Stock with High Returns
The main reason investors like reliable dividend stocks is that, over time, they tend to provide a steady stream of passive income to shareholders. But in the case of FedEx Corporation (NYSE:FDX), the company has delivered much more than just dividends.
Consider this: at the beginning of this year, FedEx stock was trading around $155.00 per share. Today it’s at $285.21, marking a return of 84%. For a decades-old large-cap shipping company, that was quite a rally.
FedEx Corporation (NYSE:FDX) Stock Chart
Chart courtesy of StockCharts.com
As a dividend investor, I always liked FedEx stock. In March 2019, I told Income Investors readers to consider the company because it offered an attractive valuation and strong dividend growth.
But things have changed. Since that article was published, FDX stock has surged by about $109.00 per share. Obviously, because of the massive rally in FedEx stock, the shares are no longer as cheap as before—even after taking into account the growth in earnings.
At the same time, the company won’t be raising its payout in the near future.
In a filing to the Securities and Exchange Commission in May, FedEx disclosed that, as part of an agreement with lenders, the company would not be buying back its shares or increasing its common stock dividend until May 31, 2021. (Source: “Form 8-K,” FedEx Corporation, May 27, 2020.)
In other words, the company is sticking with its current dividend rate, which is $0.65 per share per quarter. At today’s share price, FedEx’s quarterly cash payout translates to an annual dividend yield of just under one percent.
While the yield is nothing special, keep in mind that these are extraordinary times. The COVID-19 pandemic has sent shock waves across the world economy, and dividend cuts are not uncommon. While every income investor undoubtedly wants dividend growth, FedEx freezing its dividend is still miles better than cutting it.
Plus, the company has a pretty solid dividend growth history. Since FedEx initiated a dividend policy in 2002, its quarterly payout has gone from $0.05 per share to $0.65 per share, marking a total increase of 1,200%. (Source: “Stock Information,” FedEx Corporation, last accessed November 12, 2020.)
This track record shows, at the very least, that this company is willing to return cash to investors. So if FedEx’s business grows, there could be more dividend increases in the future once the lenders’ restriction is lifted.
As it turns out, FedEx has been running a growing business, even during the pandemic. In the first quarter of the company’s fiscal year 2021, which ended August 31, 2020, it generated $19.3 billion of revenue, representing a 13.5% increase year-over-year. (Source: “FedEx Corp. Reports Strong First Quarter Results,” FedEx Corporation, September 15, 2020.)
In the same period, FedEx Corporation achieved an adjusted operating margin of 8.5%, marking a 240-basis-point expansion from the 6.1% reported in the year-ago period.
At the bottom line, the company earned an adjusted profit of $4.87 per share in the first quarter of fiscal 2021. Again, this represented a significant increase because, in the first quarter of fiscal 2020, its adjusted net income was $3.05 per share.
When a stock is shooting through the roof, expectations are usually high. But FedEx’s numbers have turned out to be even better than Wall Street’s estimates. On average, analysts expected the company to generate $17.5 billion of revenue and $2.69 in adjusted earnings per share for the quarter.
The reality is, as people stayed at home due to the pandemic, they shopped online more often, instead of going to physical stores. And as e-commerce sales soared, FedEx’s shipping business got a solid boost.
Due to the uncertain economic outlook, management did not provide guidance, but they did say in their earnings conference call that “As we look to Q2, we enter what we expect to be a peak holiday shipping season like no other in our company’s history.” (Source: “FedEx Q1 FY21 Earnings Call Transcript – September 15, 2020,” FedEx Corporation, September 15, 2020.)
While no numbers are being given out, it looks like the holiday season could be a major catalyst for FedEx’s business.
Don’t forget, FedEx Corporation is much more than just a stay-at-home stock. The company also stands to benefit from the ongoing economic recovery. As businesses start to reopen and economic activity resumes, global commercial shipping volume will likely increase from the current level.
Add it up and you’ll see that FDX stock is a growth stock that should also be able to regain its status as a dividend-growth stock in the years ahead.