Relax! This Company Just Raised Their Dividend 53%

Have equities fallen out of favor with retail investors? Sure, a combination of interest rates, recession risk, and geopolitical issues have pushed stocks into a bear market. And, I wouldn't blame investors for thinking "this time it's different", however, time and again throughout history, these words are proven incorrect. Indeed - they could be the four most dangerous words when it comes to investing.

That said, as of today, the S&P500 is trading around 18 times earnings. It's actually quite rare to have the entire index trading in this zone. And for those investors who prefer picking individual stocks, dividend stocks are largely on sale.

FedEx (FDX)

Take, for instance, FedEx. FedEx is the leader in worldwide express delivery services. The company provides a broad portfolio of transportation, e-commerce, and business services through companies competing collectively, operating independently, and managed collaboratively, under the FedEx brand.

The company is currently reporting, primarily through the FedEx Express (including TNT Express), FedEx Ground, and FedEx Freight segments. FedEx Express offers time-definite delivery to more than 220 countries and territories, connecting markets that comprise almost the entire gross domestic product of the world.

FedEx increases their dividend by 53%

On June 14, 2022, FedEx announced they are raising their quarterly dividend from $0.75 to $1.15 representing a 53% increase from last quarter and a 2% yield at yesterday's close. And this sent the stock soaring 14.41%. But, is now the time to buy?

FedEx is a darling for dividend growth investors for a number of reasons.

First, FedEx has a strong history of financial stability and growth. For example, the pandemic caused a surge in package delivery. That said, as we emerge from the pandemic, the stock is down -11.31% YTD. However, compared with the SPX's return of -22%.

Second, when we look at FedEx's financials, astute investors will note their 5-year revenue growth is over 66% and 5-year earnings growth is even higher at 68%. It's rare that a company can both increase revenue and earnings at the same rate. Not only that, FedEx's 5-year dividend growth rate is a whopping 230% - including yesterday's announcement.

Third, FedEx has durable competitive advantages. It's a global leader in shipping and logistics, which makes it difficult to compete. While competitors focus on price, FedEx famously focuses on reliable, rushed deliveries.

Finally, FedEx has a new CEO, Raj Subramaniam after the previous CEO & founder, Fred Smith, moved aside. New leadership usually means fresh ideas and a new set of eyes.

What the analysts say

To find the analyst ratings of a particular stock, start by searching for the stock, and then click on "Analyst Ratings" on the left sidebar.

Next earnings date

FedEx's next earnings release date is scheduled for June 23, 2022. Further, analyst ratings across the board are a solid buy. Analysts expect EPS to come in at $6.86 per share for the quarter ending 05/2022.

That said, FedEx’s recent earnings periods haven’t always been stellar. For example, in the quarter ending 08/21, FedEx missed estimates by nearly 12%. 

Alternative ways to buy FedEx stock

Investors who are not quite ready to take the plunge can always consider looking to the options market for different ways to buy the stock. For example, investors who think the price of the stock is going up can buy an out-of-the-money call option, or sell an out-of-the-money put option.

Buying an out-of-the-money call option

For investors who don't want to tie up a lot of capital in FedEx stock, or don't feel comfortable buying the stock outright, buying an out-of-the-money call option is a great way to get exposure to the stock while limiting your risk.

For example, August 19 $240 call options are trading around $13.20. This means that if FedEx stock is trading above $240 on August 19, the option will be in-the-money and you will make a profit by either exercising your option and buying the 100 shares of FedEx, or selling the option at a higher price than you paid. 

Of course, should FedEx trade lower than $240, your losses are capped at what you paid for the option.

To find options for a particular stock, search for the stock, click on "Options Prices" on the left sidebar, and then select the expiration date you are interested in.

Selling an out-of-the-money put option

Selling a put option is another way to get exposure to the stock while limiting your risk.

For example, August 19 $200 put options are trading around $8.00. This means that if FedEx stock is trading above $200 on August 16, you will keep the premium, and if it is below $200, you will be assigned shares of FedEx stock at a price of $200. Regardless, you get to keep your premium.

Final thoughts

Compared with its peers, FedEx is trading at a discounted P/E multiple and has a fantastic track record of increasing both the top and bottom lines. Add to that a dividend-friendly CEO, and a low dividend payout ratio, and FedEx could turn into a solid asset for dividend growth investors in the future.