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FedEx: Is Its Free Cash Flow Enough for Dividend Payments?

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FedEx’s free cash flow

FedEx (FDX) paid a regular cash dividend of $0.50 per share on EPS (earnings per share) of $2.84 in fiscal 2Q18. That translates to a dividend payout ratio of 17.6%. Compared with competitor United Parcel Service’s (UPS) DPR (dividend payout ratio) of 54%, FDX’s ratio is substantially lower. However, over the last few quarters, FDX’s dividend payout ratio has increased steadily. Its DPR points to its reinvestment levels in the form of capital investment.

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FedEx’s free cash flow

A company pays dividends and repurchases common stock out of its FCF (free cash flow). FCF represents the excess cash available over capital expenditure after deducting it from operating cash flow.

As you can see in the above chart, FedEx had negative FCF in six of the past 14 quarters. Given the levels of quarterly cash dividends, its FCF was much more negative in the most recent two quarters. On a yearly basis, its FCF has fallen from $1 billion in 2015 to $880 million in 2016. However, in fiscal 2017 and for the first half of fiscal 2018, its FCF has been negative.

In contrast, rival United Parcel Service has positive FCF. In 2017, its FCF was $1.5 billion, which was 58% lower than $3.5 billion in the previous year. In 2015, UPS’s FCF was $5.1 billion. Its current FCF is sufficient to support its dividend payment. UPS’s yearly FCF could be better than FedEx’s FCF, assuming both companies receive the same benefit from the implementation of the Tax Cuts and Jobs Act.

ETF investment

There are 94 ETFs that have FedEx in their portfolios. Among them are the iShares Transportation Average (IYT), which has the highest exposure (or 15.1%) to FDX. Major US railroads and trucking companies make up 25.8% and 11.7%, respectively, of IYT’s portfolio holdings.

In the next part, we’ll compare FedEx’s forward dividend yield with its peers.

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