Buy FedEx as it earns record profits

Transportation and logistics stock FedEx Corp. earned record profits in the year to May 31. It expects to earn record profits in fiscal 2018 and 2019. This global, blue chip stock has raised its dividend by a quarter. It remains a buy for long-term share price gains and small, growing dividends.

fedexMemphis, Tennessee-based transportation stock FedEx Corp. earned record profits for the fourth year in a row. It’s expected to earn record profits again this year and next. The company is rewarding its shareholders by raising its dividends and buying back its shares. FedEx remains a buy for further share price gains and small, growing dividends.

FedEx writes that it “provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services”. This geographical diversification protects it from difficult conditions in smaller markets.

In the year to May 31, FedEx earned $3.33 billion, or $12.30 a share, excluding one-time items in both years. This was up by 13.9 per cent from earnings of $3.02 billion, or $10.80 a share, the year before.

FedEx buys back its shares

Earnings per share grew faster than total earnings. That’s because FedEx repurchased 2.96 million of its own shares in fiscal 2017. It has reduced the number of shares outstanding from a peak of 318 million in fiscal 2014 to 270 million today. We expect the company to buy back more shares this year.

FedEx executive vice president and chief financial officer Alan Graf said: “Investments to modernize our aircraft fleet and expand our FedEx Ground capacity are supporting our strong earnings growth. We are very optimistic about fiscal 2018 as evidenced by our earnings outlook.” This year, FedEx expects to invest $5.9 billion. This would represent capital investment growth of 15.7 per cent from last year. Part of FedEx Ground’s planned investment in capacity expansion last year was deferred to this year. The company writes: “We expect to incur significant expenses over the next few years in connection with our integration of TNT Express.”

FedEx is investing heavily despite risks

The acceleration in the global economy bodes well for FedEx’s businesses. One risk is if President Donald Trump and the US Congress impose taxes or tariffs to restrict imports. This could hurt U.S. exports if other countries retaliate. Still, FedEx’s management is upbeat about the outlook.

Given its increasing earnings and favourable outlook, FedEx has raised its dividend again. It will now pay $2.00 a share—up by 25 per cent from last year. Given the company’s high share price, however, the dividend yields a small 0.93 per cent.

Management is optimistic about FedEx’s long-term outlook. Chairman and chief executive officer Frederick W. Smith said: “We enter fiscal 2018 confident FedEx Corp. will continue to deliver outstanding value and opportunities for share owners . . . for years to come.” A global recession, however, could hurt the company’s earnings as it did in the recession years of 2008 and 2009.

FedEx is reasonably priced

In fiscal 2018, which began June 1, FedEx expects to earn a record $13.20 to $14.00 a share. Based on an estimate of $13.67 a share, it trades at a reasonable price-to-earnings, or P/E, ratio of 15.8 times. Next year, FedEx is expected to earn $15.42 a share. Based on this, it trades at a better P/E ratio of 14 times.

The consensus recommendation of 11 analysts is that FedEx is a ‘buy’. We agree. FedEx remains a buy for further long-term share price gains and small but growing dividends.

This is an edited version of an article that was originally published for subscribers in the July 7, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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