tiprankstipranks
Can FedEx Stock Deliver Gains to Investors?
Stock Analysis & Ideas

Can FedEx Stock Deliver Gains to Investors?

FedEx (NYSE: FDX) provides transportation, e-commerce, and business services in the United States and internationally.

The company is generally considered a safe investment as it is large, profitable, and appears to have an effective management team.

In addition, Wall Street analysts are mostly bullish on the stock. Nonetheless, we are neutral on FedEx.

Economic Spread

Great companies often have great management teams who can effectively allocate capital to profitable projects. Many professional fund managers tout the importance of meeting with a company CEO in order to gauge if that person is right for the job.

However, we may be able to get a good picture of management’s effectiveness by simply looking at the numbers. A metric we like to look at is the economic spread which is defined as follows:

Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital

The idea is very simple; if the return on invested capital is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and would be better off simply investing money into risk-free bonds.

For FedEx, the economic spread is a follows:

Economic Spread = 9.8% – 7.2%
Economic Spread = 2.6%

As a result, the company is creating value for its shareholders, implying that management is efficiently allocating capital.

Dividend

For investors that like dividends, FedEx currently has a 1.1% dividend yield, which is below the sector average of 1.34%. When taking a look at its LTM free cash flow figure of $2.8 billion, its $745 million dividend payment looks safe.

Taking a look at its historical dividend payments, we can see that its yield range has trended slightly upwards in the past several years.

At 1.1%, the company’s dividend is near the middle of its range when excluding 2020’s selloff. This implies that the stock price is trading at a fair value relative to the yields investors have seen in the past during normal economic times.

Nonetheless, FedEx is not a top dividend stock and likely not a good addition to a dividend-seeking portfolio as its yield is low.

Risks

The first risk we would like to highlight pertains to the dividend. Although it currently appears to be safe, FedEx’s historical free cash flows have been volatile.

Image created by the author

As you can see, there are years where the company was spending heavily on capital expenditures, bringing the free cash flow as low as -$1 billion.

Although this is likely not to be a problem since the company was investing in growth, investors should keep this in mind since the dividend is currently $745 million on a trailing 12-month basis.

Companies don’t want to cut dividends because it sends a bad message to investors. Therefore, this might lead FedEx to take on more debt if it wants to invest in growth simply to maintain the dividend.

The company currently has close to $37 billion of debt, which is not ideal considering that free cash flow was only $2.8 billion in the last 12 months.

Wall Street’s Take

Turning to Wall Street, FedEx has a Strong Buy consensus rating, based on 13 Buys, two Holds, and zero Sells assigned in the past three months. The average FedEx price target of $309.07 implies 21.6% upside potential.

Final Thoughts

Although FedEx is a profitable company that is creating value for shareholders, the company’s volatile free cash flows and high debt load make it not an ideal pick for us. As a result, we are neutral on the stock.

Download the TipRanks mobile app now

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles