Wal-Mart vs. United Parcel Service: Which Stock's Dividend Dominates?
Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.
But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, Wal-Mart and United Parcel Service , two companies that have come to symbolize different aspects of the new globalized retail economy, will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.
Tale of the tape
Founded in 1962, Wal-Mart is the world's largest retailer, and ranked as the world's second-largest public corporation on the Fortune Global 500 list in 2013. The company operates more than 11,000 stores under 69 banners in 27 countries, and also maintains e-commerce websites in 10 countries. The Arkansas-based colossus is perhaps more responsible than any other company for changing the way America shops, as its supply chain advancements have helped set the standard for globally-oriented retail operations for decades. However, Wal-Mart has also become a symbol of the purported evils of globalism, as these same supply chain advancements have spurred the growth of sweatshop labor in the developing world while simultaneously crowding smaller local retail enterprises out of many communities.
Founded in 1907, United Parcel Service is the world's largest package-delivery company by revenue and volume, and is a global supply chain leader, making it an ideal complement to Wal-Mart's retail operations. UPS delivers roughly 1.8 million packages each business day to over 200 countries and territories. and also provides supply chain solutions to customers in over 175 countries and territories. In its last few decades, UPS has expanded enormously through the acquisition of nearly 40 companies, which have included retail shipping services, trucking and air freight, and international trade services.
Statistic | Wal-Mart | United Parcel Service |
|---|---|---|
Market cap | $257 billion | $93.7 billion |
P/E ratio | 15.5 | 66.2 |
Trailing 12-month profit margin | 3.6% | 2.7% |
TTM free cash flow margin* | 2.5% | 9.1% |
Five-year total return | 69.2% | 121.2% |
Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.
Round one: endurance (dividend-paying streak)
Wal-Mart is one of investors' favorite dividend stocks because it's paid uninterrupted dividends for a period of 39 years since initiating payment in 1974. That's an easy win for Wal-Mart over UPS, which only began paying quarterly dividends in 1999, according to Dividata.
Winner: Wal-Mart, 1-0.
Round two: stability (dividend-raising streak)
According to Dividata, UPS has been increasing its dividend at least once per year since 2010, after holding steady in 2009 during the global financial crisis. On the other hand, Wal-Mart has raised its dividend payments every year since 1975, which works out to 38-year dividend-raising streak. This is even more lopsided in Wal-Mart's favor than the first contest.
Winner: Wal-Mart, 2-0.
Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:
WMT Dividend Yield (TTM) data by YCharts
Winner: United Parcel Service, 1-2.
Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.
WMT Dividend data by YCharts
Winner: Wal-Mart, 3-1.
Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:
WMT Cash Dividend Payout Ratio (TTM) data by YCharts
Winner: United Parcel Service, 2-3.
Bonus round: opportunities and threats
Wal-Mart may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.
Wal-Mart opportunities
Wal-Mart has been trying to replicate Amazon's e-commerce business model.
Wal-Mart bought a controlling stake in Yihaodian to scale up its online sales in China.
It plans to open a new Internet tech development lab in nearby Sunnyvale next year.
Wal-Mart's testing a convenience-store format and plans to open 300 such stores by the end of next year.
United Parcel Service opportunities
UPS has the largest fleet of gas-powered vehicles in the U.S.
UPS could be eying self-driving trucks for higher operational efficiencies.
The company will offer 3-D printing services through its franchised UPS Store chain.
The shift toward online retailing has immense long-term benefits for delivery services.
Wal-Mart threats
Several governments have launched investigations against Wal-Mart over bribery allegations.
Amazon and other online retailers continue to grow much faster than brick-and-mortar retail.
High unemployment rates and increased payroll taxes continue to batter the U.S. retailers.
United Parcel Service threats
Amazon teamed with the United States Postal Service for Sunday package deliveries.
UPS is losing high-priced business as international shippers switch to low-cost services.
One dividend to rule them all
In this writer's humble opinion, it seems that Wal-Mart has a better shot at long-term outperformance, as its aggressive expansion plans in emerging markets have helped offset domestic weakness. However, the company's once-indomitable supply chain advantage has eroded, and a shift to online retail could ultimately tip UPS into the lead as more consumers decide that they'd rather have their purchases delivered from a nearby warehouse instead of bagged up at a checkout line. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!
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The article Wal-Mart vs. United Parcel Service: Which Stock's Dividend Dominates? originally appeared on Fool.com.
Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and United Parcel Service. The Motley Fool owns shares of Amazon.com. 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.
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