Growing profits make FedEx a bargain blue chip stock

U.S. Key stock FedEx earned record profits last year. It’s expected to set new records this year and next. This gives the company the cash to build its business and reward its shareholders. FedEx is a bargain stock for value investors seeking share price gains and growing dividends.

U.S. Key stock FedEx Corporation (NYSE—FDX) earned record-high profits in the year to May 31. It’s expected to do so again this year and next. The company is using its growing earnings and cash flow to build its business. We also expect it to keep raising its dividend each year. FedEx remains a buy for long-term share price gains as well as small, but growing dividends.

FedEx is a widely-recognized brand. It writes that it “provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services.” The company generated revenue of $50.4 billion in fiscal 2016.

In fiscal 2016, FedEx earned an adjusted $3.02 billion, or $10.80 a share. This record-high profit was up by an impressive 20.7 per cent, from an adjusted $2.57 billion, or $8.95 a share, the year before.

FedEx’s earnings per share went up substantially more than its total earnings. That’s because it spent $2.718 billion last year to buy back its shares—18.2 million of them. This is one way the company rewards you. We expect it to continue to repurchase its shares. It has done so consistently since fiscal 2013.

FedEx rewards you with growing dividends

FedEx also rewards you by raising its dividends. It began paying a dividend of six cents a share in fiscal 2002. Since then it has raised its dividend each year, except in the difficult year of fiscal 2010. That year, it maintained its dividend of 44 cents a share.

FedEx’s current dividend of $1.60 a share is up by close to 27-fold from its initial dividend. True, the dividends yield just under one per cent. That’s because of the nice ‘problem’ of the shares having risen enormously. We expect the company to continue to raise your dividends. This will give you a growing stream of income. It also increases your chances of earning more share price gains. That’s because income-seeking investors will bid up FedEx’s shares.

The growing earnings and cash flow have assisted FedEx in building its business. Executive vice president and chief financial officer Alan Graf said: “Our strong operating cash flow generation allowed us to invest in FedEx this past year. We executed on numerous capital projects and completed the acquisition of TNT Express, our largest ever.” This company will contribute to FedEx’s revenue, earnings and cash flow throughout fiscal 2017.

In fiscal 2016, FedEx made capital investments of $4.8 billion. This year, it expects its capital investment to climb to $5.1 billion. This “includes ongoing expansion of the FedEx Ground network and planned aircraft deliveries to support the FedEx Express fleet modernization program.”

FedEx is an attractive bargain stock for value investors

In fiscal 2017 (which began June 1), FedEx expects to earn, on an adjusted basis, $11.75 to $12.25 a share. We use the mid-point of $12 a share as our estimate. Based on this, the shares recently were trading at a price-to-earnings, or P/E, ratio of 13.4 times. That’s reasonable for a company that’s earning record profits and that keeps raising its dividends. Next year, FedEx’s earnings are expected to increase by 13.9 per cent, to $13.67 a share. Based on this estimate, the shares trade at an even better P/E ratio of 11.8 times.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.