Fedex shares shot up to $320 in 2021 as the COVID-19 lockdowns prompted consumers to buy more goods online. That spurred strong demand for its delivery services. The stock then fell to $142 in September 2022 as stores re-opened and online shopping volumes leveled off. Higher fuel and labour costs also hurt earnings.
However, the stock has since rebounded strongly thanks to a new plan to cut costs. Improving efficiency will also help the company better respond to changing market conditions, particularly as business trade volumes between the U.S. and other countries return to pre-pandemic levels.
Moreover, the company’s cost savings give it more cash to reward investors with share buybacks and dividend increases. That’s why it’s one of our top picks for the long run.
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FEDEX CORP. (New York symbol FDX; www.fedex.com) delivers packages and documents in the U.S. and 220 other countries.
FedEx has three main businesses: FedEx Express (mainly air freight), supplying 50% of its revenue and 17% of its earnings in fiscal 2023; FedEx Ground transportation service (39% of revenue, 51% of earnings); and FedEx Freight, mainly less-than-truckload (LTL) shipping (11%, 32%).
To better align the company’s air and ground fleets with package volumes, FedEx recently initiated a new restructuring plan it calls DRIVE. Under that plan, the company permanently retired 18 older planes in fiscal 2023 and plans to remove a further 29 from service in 2024. It’s also consolidating facilities, reducing routes and cutting jobs.
Another part of the DRIVE plan includes merging the air and ground divisions into a single operating company by June 2024; the LTL business will continue to operate separately. Eliminating overlapping functions should boost the efficiency of its pickup-and-delivery service by between 15% and 20%.
In all, FedEx expects severance payments and other costs will total $2.5 billion through the end of fiscal 2025. However, the plan should lower its annual costs by $1.8 billion in fiscal 2024. Those annual savings will rise to $4.0 billion when the company completes the program.
FedEx is also investing in new fuel-efficient aircraft and upgrades to its major air freight processing hubs in Memphis and Indianapolis.
For fiscal 2024, the company expects to spend $5.7 billion on capital upgrades, down about 8% from $6.17 billion in 2023. Once it completes its current aircraft purchase commitments, spending on new planes will fall from $1.5 billion in 2024 to $1.0 billion in 2026.
Growth Stocks: Fedex’s strong balance sheet cuts your risk
The company’s solid balance sheet will support these investments. As of May 31, 2023, it held cash of $6.86 billion, while its long-term debt of $20.45 billion is a moderate 29% of its market cap.
Investors also benefit now that FedEx has settled a dispute with activist investor D.E. Shaw & Co. As a result, FedEx added more independent directors to its board and adjusted executive compensation to better correlate cash bonus payments with actual shareholder returns.
The company is also returning more cash to shareholders. Starting with the July 2023 payment, FedEx raised the quarterly dividend by 9.6%, to $1.26 a share from $1.15. The new annual rate of $5.04 yields 1.9%.
What’s more, in December 2022, the company completed a plan to buy back $1.5 billion of its shares. Share buybacks reduce the number of shares outstanding. That boosts earnings per share since profit is divided among fewer shares. The improved per-share ratio makes the stock more attractive to investors.
Under its current authorization, FedEx can still repurchase up to $2.6 billion of its shares. There are no time limits for those purchases.
In fiscal 2024, the company’s earnings will probably rise about 17% to $17.49 a share. The stock trades at just 12.1 times that forecast.
As FedEx realizes more of the benefits from its savings plan, earnings will probably gain a further 25% to $21.82 a share in 2025.
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