Increased Competition Creates an Income Opportunity

Shipping

As a company grows, it often requires investor capital to succeed. That can mean issuing shares over time. As a company matures, its cash flows rise, and they can start rewarding investors with buybacks and dividends.

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  • Dividends aren’t as tax efficient, but investors tend to flock to cash flows. If a company’s dividend comes under threat, however, a big selloff may be in the works.

    Shares of United Parcel Service (UPS) sank to a multi-year low, following earnings and a report that Amazon (AMZN) will be cutting its shipping volume.

    The company reports that its dividend, which has now been pushed up to the 5% range, is safe for now.

    A look at UPS’s earnings per share and dividend payout suggests that’s technically true. But if earnings slide in the next few quarters, a cut could be in the cards.

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  • Action to take: UPS shares may see an oversold bounce here in the coming weeks. Aggressive investors may want to bet on a rebound, and for the chance to collect a few dividend payments.

    But if earnings can’t improve or guidance suggests further weakness, it may be time to take a relatively quick profit on the stock.

    For traders, the March $120 calls, last trading for about $1.50, could see mid-double-digit returns or better on a bounce in the coming weeks. Traders will likely want to close the trade quickly after a jump higher, rather than look to hold until expiration.

     

    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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