UPS Inc. has set a new and higher “baseline” for package-delivery volumes as a result of its performance since the COVID-19 pandemic took hold more than two years ago, according to Standard & Poor’s, which upgraded UPS’ debt to an “A” rating from an “A-minus” rating on Wednesday.
S&P’s global ratings section forecasts UPS’ (NYSE: UPS) revenue growth to slow to 4% per year in 2022 and 2023, down from 14% to 15% in 2020 and 2021 as pandemic-related surges in online ordering led to historic increases in delivery volumes. UPS’s top-line growth expectations, according to the S&P unit, will be driven more by pricing trends than by volume gains. Pricing stability, along with a concentration on more price-inelastic small to midsize enterprises, would allow UPS to grow at a somewhat higher rate than predicted US GDP growth through 2023, despite potential restrictions to global volume growth during that time, according to the paper.
The unit stated that the volume growth in 2020 and 2021 has created a new standard in delivery activity. Following the epidemic, there has been a “permanent shift” from brick-and-mortar shopping to online fulfillment, according to the unit.
Typically, an upgrade of a company’s debt by a rating agency results in more favorable borrowing conditions if the company needs to enter the financial markets.
According to the unit forecast, UPS’ current funds from operations (FFO) to debt ratio should be in the mid-50 percent level in 2022 and in the upper 50s in 2023. This is considerably beyond the agency’s 30% debt upgrade threshold. FFO increased from $4 billion in 2020 to $14.6 billion in 2021, driven by 15% year-on-year revenue growth and a 290-basis-point margin gain. According to the unit, FFO should dip into the high $14 billion level in 2022 and the low $15 billion range in 2023 as a result of margin gains in 2021 and favorable e-commerce fulfillment trends.
UPS has upped its dividend by 49 percent and doubled its share buyback to $2 billion in an effort to increase shareholder returns. According to the unit, these changes are unlikely to put a strain on the company’s finances. With free operational cash flows in the high $8 billion to low $9 billion range this year and next year, along with $12.5 billion in cash equivalents and marketable securities, the company’s financial health can sustain both larger shareholders dividends and debt payments, according to the agency.
The agency stated that it may reduce UPS’ debt rating if the FFO-to-debt ratio consistently approaches the mid-30% range. This could occur as a result of the company’s plans to adopt more aggressive-than-anticipated shareholder returns, or if recent profitability improvements are not sustained. It might, on the other hand, significantly upgrade UPS’ debt if the ratio remains comfortably over 45 percent if operating performance improves or the firm accelerates its debt-reduction plans.
In Wednesday trading, UPS shares dipped 2.55 percent.
