UPS Inc. has established a new and higher “baseline” for package-delivery volumes in the wake of its performance since the COVID-19 pandemic took hold more than two years ago, rating agency Standard & Poor’s said Wednesday in upgrading UPS’ debt to an “A” rating from “A-minus.”
S&P’s global ratings unit said it expects UPS’ (NYSE: UPS) revenue growth to moderate to 4% a year in 2022 and 2023, below outsized growth rates of 14% to 15% in 2020 and 2021 as pandemic-related surges in online ordering led to unprecedented spikes in delivery volumes. The S&P unit said its top-line growth expectations for UPS will be driven more by pricing trends than by volume increases. Pricing stability, along with a focus on more price-inelastic small to midsize businesses, will allow UPS to grow at levels slightly above projected U.S. GDP growth through 2023 despite possible constraints to global volume growth over that time, the report said.
The volume growth in 2020 and 2021 has established a new benchmark in delivery activity, the unit said. A “permanent shift” to online fulfillment from brick-and-mortar shopping has taken place in the wake of the pandemic, the unit said.
Typically, a rating agency’s upgrade of a company’s debt results in more favorable borrowing terms should the company need to tap the capital markets.
The ratio of UPS’ current funds from operations (FFO) to debt should be in the mid-50% range in 2022 and the high-50s area in 2023, the unit forecast. That is well above the agency’s 30% threshold for debt upgrades. FFO surged to $14.6 billion in 2021 from $4 billion in 2020, led by 15% year-on-year revenue growth and a 290-basis-point margin increase. FFO should fall in the high $14 billion range in 2022 and the low $15 billion area in 2023 due to the margin gains in 2021 and favorable e-commerce fulfillment trends, the unit said.
In an effort to boost shareholder returns, UPS has increased its dividend by 49% and doubled its share buyback to $2 billion. Those moves are unlikely to strain the company’s financial position, the unit said. With free operating cash flows in the high $8 billion range this year and the low $9 billion range next year, combined with $12.5 billion in cash equivalents and marketable securities, the company’s financial strength can simultaneously support higher shareholder returns and debt repayment, the agency said.
The agency said it could downgrade UPS’ debt rating if the ratio of FFO to debt approaches the mid-30% area on a sustained basis. This could happen due to the company’s plans to implement more aggressive-than-anticipated shareholder returns or if it can’t sustain recent profitability improvements. Conversely, it could further upgrade UPS’ debt if the ratio stays comfortably above 45% should operating performance improve or if the company accelerates its debt-reduction program.
UPS shares fell 2.55% in Wednesday trading.
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