UPS: Issues to consider

UPS (UPS US): Issues to consider

Background
UPS appears to be struggling to keep up with industry trends. Between 2011 and 2016, revenue and profit growth was inferior to its closest competitors and much slower than the E-commerce sales. Unsurprisingly, the stock has also lagged both its peers and the S&P. For this dour performance, the top five managers received US$165m. Their incentive scheme is based around short term total shareholder returns and ignores the company’s rising liabilities. Allowing management to sacrifice the staff and increase business risk in the pursuit of big bonuses.

Issues to consider

Why does the management incentive scheme ignore risk? Increased leverage means, management is getting paid but the risk that company could default on its obligations is rising.
Why does UPS invest so much less than its peers?
Why has the company benefitted so little from the falling oil price?
The company is stopping the staff pension scheme. Are they going to treat their management contracts the same way?
Why has the company directed most of its sustainable cashflow to shareholders instead of investing it or reducing the pension deficit?
The pension deficit is the result of underestimating its costs and so overstating profits in the past. Will managements/shareholders be asked to repay undeserved bonuses and dividends?
UPS bought Coyote for US$1.8bn, most of which was goodwill. Since then profits in this division have fallen. Is there a write-off coming?

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Important
This note is written with the sole purpose of highlighting some issues we think are important.
It is not a recommendation to BUY or SELL any of the securities mentioned and should not be taken as such.
Readers should form their own opinions about the company and seek appropriate advice.
Please read the Bucephalus disclaimer.