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My Top Dividend Stock for the Second Half of 2022 (and It's Not Even Close)

Motley Fool - Fri Aug 5, 4:03AM CDT

Earnings season is off to a roaring start as company results and guidance combine with macroeconomic data points. United Parcel Service(NYSE: UPS) reported its Q2 2022 results on July 26 and issued updated full-year guidance.

Here's why the package delivery company continues to separate itself from the competition and is a top dividend stock to buy and hold for decades to come.

A person sits at a table and prepares a package for shipment.

Image source: Getty Images.

At the top of its game

UPS is one of the few pandemic-related growth stories whose results keep improving. Similar to companies that benefited from a short-term shift away from in-person goods and services to online and stay-at-home activities, UPS's growth accelerated in 2020. However, what makes UPS stand out is that its growth has continued in 2021 and 2022.

The company is generating record results, posting $24.8 billion in Q2 2022 consolidated revenue, 5.7% higher than its Q1 2022 and the highest second-quarter revenue number in company history. Consolidated operating profit was up 9.3% from the same quarter last year on an adjusted basis, and diluted earnings per share was up 7.5% from Q2 2021.

What makes UPS's results so impressive is that its 2021 comps were record highs. There are very few companies that can lap such strong quarters with even better results -- especially in the industrial sector, which is sensitive to the ebbs and flows of the broader economy.

UPS's secret sauce

The key to UPS's success is its top management team and industry-leading shipping and logistics network. The company's "better, not bigger" framework focuses on quality over quantity. Put another way, UPS aims for high operating margins and top customer service instead of high volumes and low margins.

A key aspect of better, not bigger is investing in route expansions, research and development like better tracking, and paying workers competitive wages to retain top talent. Throughout the labor shortage, UPS has not struggled because it offers employees excellent pay, benefits, and the potential for raises and promotions.

UPS's delivery volumes slowed in Q2, but it was still able to pass along higher fuel costs and other expenses to customers -- demonstrating its pricing power even in a challenging environment. Last quarter, UPS's operating margin stood at 13.5%. Now, it's guiding for a full-year operating margin of 13.7%, full-year consolidated revenue of $102 billion (which would be the first $100 billion-plus revenue year in company history), record-high dividend payments of $5.2 billion, and share buybacks of $3 billion.

A flexible behemoth

Despite a slowdown in delivery volumes, UPS continues to prove why its customers will pay a premium price for its services. 2022 also provides a stress test of how UPS can win in different situations.

In 2020, e-commerce boomed, and UPS benefited from an uptick in business-to-consumer (B2C) demand despite a slowdown in business-to-business (B2B). In 2021, both B2C and B2B were firing on all cylinders. During its Q2 2022 conference call, UPS said that high inventory levels for retailers are leading it to discount items and try and move products out the door, which benefits the company even as consumer spending weakens.

In this vein, we could see a rather muted holiday season, but UPS could still do well if companies try to move their products. I would be particularly interested to see how UPS does around Black Friday, which could be record-setting in terms of sales volumes, given that retailers are desperate to sell out-of-season products and make room for the holiday season.

In sum, the three-year period between 2020 and 2022 is proving to be an excellent case study on the resilience of UPS's business model in completely different economic climates and its ability to pull different levers to grow revenue, operating margin, and diluted EPS year after year.

A powerful passive income stream

Carol Tomé took the helm as UPS CEO in spring 2020 during the worst of the pandemic. She embraced the challenges and continues to prove why she is arguably one of the best CEOs of any Fortune 500 company. Since Tomé has taken over, UPS has exceeded virtually every goal it has set.

In addition to being a market-beating stock, UPS has also passed along added value to shareholders by growing the dividend and raising share buybacks. UPS's record 49% dividend raise earlier this year pole-vaulted its payout to $6.08 per share -- giving it a dividend yield of 3.3%. UPS stock also has a price-to-earnings (P/E) ratio of just 15.1 -- giving it a below-market multiple despite being a top performer.

UPS can't control an economic slowdown in the broader economy, which could lead its business to slow down in a prolonged recession. However, the company continues to do a phenomenal job with everything it can control. All this means there is arguably no better dividend stock to buy in the second half of 2022 and hold for the long term than UPS.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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