FedEx's Bullish Move: $5 Billion Stock Buyback Plan Ignites Investor Enthusiasm

FedEx Corporation (FDX), a leading provider of transportation, e-commerce, and business services, plans to repurchase $5 billion worth of its shares as its cost-cutting measures contribute to increased profits, leading to a significant surge in the company's stock, marking its most substantial gain in a year.

FDX’s shares have soared more than 18% over the past month and nearly 30% over the past year.

This newly authorized $5 billion share repurchase program comes in addition to the existing $600 million available for repurchase under the 2021 authorization. During the third quarter of fiscal 2024, the courier company completed a $1 billion accelerated share repurchase (ASR) transaction. About 4.1 million shares were delivered under the ASR agreement.

FedEx also intends to repurchase an additional $500 million of common stock during the fourth quarter, bringing the fiscal 2024 buyback total to $2.5 billion. The company’s cash on-hand was $5.60 billion as of February 29, 2024.

“DRIVE is having a real impact, supporting both operating income growth and margin expansion,” said John Dietrich, FDX’s executive vice president and chief financial officer. “As we look ahead, we’re focused on continuing to deliver on DRIVE and our commitments to support long-term shareholder returns.”

Third-Quarter Earnings Beat

For the third quarter ended February 29, 2024, FDX reported revenue of $21.74 billion, slightly missing the analysts’ estimate of $22.08 billion. Despite lower revenue, third-quarter income and margin improved, mainly due to the execution of the company’s DRIVE program and the continuous focus on revenue quality.

FedEx’s non-GAAP operating income grew 16.2% year-over-year to $1.36 billion. Its non-GAAP net income came in at $966 million, an increase of 11.7% year-over-year. The company posted a non-GAAP EPS of $3.86, compared to the consensus estimate of $3.48 and up 13.2% from the previous year’s quarter.

“FedEx delivered another quarter of improved profitability in what remains a difficult demand environment, reflecting outstanding service and continued benefits from DRIVE,” said Raj Subramaniam, FDX’s president and CEO.

“We are making meaningful progress on our transformation, while strengthening our value proposition and improving the customer experience. I've never been more confident in our path ahead as we build a more flexible, efficient, and intelligent network,” Subramaniam added.

Cost-Cutting Efforts

Over the past year, workforce reductions at FedEx totaled around 22,000 jobs, said CFO John Dietrich on a conference call with analysts. As per the company, most of these job cuts have come through attrition.

For the full-year fiscal 2024, FDX plans to reduce its planned capital spending to $5.4 billion, compared to the previously announced $5.7 billion. The logistics company expects permanent cost reductions related to the DRIV program of $1.8 billion in 2024.

In April last year, FedEx announced restructuring its business segments into one unit, embarking on a cost-cutting plan of $4 billion by 2025. The shipping giant expects the new operating structure to be entirely implemented by June 2024, bringing FedEx Express, FedEx Ground, FedEx Services, and other FedEx operating companies under the Federal Express Corporation umbrella.

Meanwhile, FDX’s Board of Directors approved an increase of 10% in its annual dividend of $0.44 per share to $5.04 for the fiscal year 2024. Its annual dividend translates to a yield of 1.78% at the prevailing share price. Moreover, the company’s dividend payouts have grown at a CAGR of 14.2% over the past five years.

Bloomberg Intelligence analyst Lee Klaskow said, “FedEx gave investors plenty to celebrate especially as it relates to showing progress towards reducing structural costs and its announced $5 billion share repurchase program.”

Bottom Line

Despite a challenging demand environment, FDX delivered another quarter of enhanced profitability, reflecting outstanding service and continued benefits from its DRIVE program. FedEx’s Board of Directors also announced a new $5 billion share repurchase program as a continued cost-saving initiative to help drive profits.

FedEx's ambitious stock buyback plan is a testament to the company's confidence in the effectiveness of its cost-cutting initiatives and restructuring efforts, potentially suggesting optimistic long-term growth prospects.

TD Cown analyst Helane Becker said in a research note that the last reported results marked the third consecutive quarter in which FDX’s operating income grew despite dropping revenue, indicating the logistics company’s cost-cutting efforts are working.

FedEx CEO Raj Subramaniam currently oversees a comprehensive restructuring of the company’s delivery networks. A significant part of this strategic plan has involved reducing the workforce by tens of thousands of jobs. The restructuring plan, announced in April last year, represents a departure from founder Fred Smith’s long-standing strategy of maintaining a two-network approach.

“We are making meaningful progress on our transformation,” Subramaniam said. The overhaul plan (DRIVE program) is expected to make permanent cost reductions of $1.8 billion in fiscal 2024.

The results from the plan demonstrate FedEx’s efforts to revitalize its Express division, which has faced challenges due to the shift by consumers and businesses toward sending more mail and packages via ground. FedEx reported that both its Express and Ground divisions saw considerable benefits from lower structural expenses during the quarter.

On March 22, 2024, Evercore ISI analyst Jonathan Chappell maintained a Buy rating on FDX and set a price target of $351. In addition, FedEx got a Buy rating from Deutsche Bank’s Amit Mehrotra.

Based on the recent insider activity of 48 insiders, corporate insider sentiment is optimistic about FDX stock. Over the past year, there were about 32 open market insider buys. Most recently, in January this year, Richard W. Smith, President and CEO of Airline and International, FedEx, bought 2,000 shares for a total of $287,080.

Given its outstanding financial performance and bright growth prospects, investing in FDX for potential gains could be wise.

Is Verizon (VZ) Stock a Buy Ahead of January 23 Earnings Release?

With a market cap of $156.86 billion, Verizon Communications Inc. (VZ) is a leading provider of communications, information technology, and entertainment products and services to consumers, businesses, and governmental entities globally. The company is scheduled to report fourth-quarter 2023 earnings on January 23, 2024.

Analysts expect VZ’s revenue and EPS for the fourth quarter (ending December 2023) to decline 2% and 8.9% year-over-year to $34.55 billion and $1.08, respectively.

For the fiscal year 2023, Street expects the company’s revenue to decrease 2.5% year-over-year to $133.47 billion. The consensus EPS estimate of $4.69 for the current year indicates a decline of 9.4% year-over-year.

Shares of VZ have plunged nearly 1% over the past five days but gained more than 2% over the past six months. On the other hand, the benchmark S&P 500 has surged approximately 1.7% over the past five days and more than 9% over the past six months.

While VZ’s stock has underperformed the S&P 500 lately, the telecom company remains attractive for income-focused investors, given its reliable dividend.

Now, let’s review the key factors that could influence VZ’s performance in the near term:

Mixed Last Reported Financial Results

For the third quarter that ended on September 30, 2023, VZ reported revenue of $33.34 billion, slightly surpassing analysts’ estimate of $33.31 billion. However, this compared to the revenue of $34.24 billion in the same quarter of 2022. The decline was primarily due to reduced wireless equipment revenue and lower postpaid upgrade activity.

But the company’s wireless service revenue came in at $19.30 billion, up 2.9% year-over-year. This increase was mainly driven by targeted pricing actions implemented in recent quarters, the larger allocation of administrative and telco recovery fees from other revenue into wireless service revenue, and growth from fixed wireless offerings.

During the quarter, total broadband net additions were 434,000, representing the fourth straight quarter in which Verizon reported more than 400,000 broadband net additions. Total broadband net additions included 384,000 fixed wireless net additions, an increase of 42,000 fixed wireless net additions from the third quarter of 2022.

The telecom giant currently has nearly 10.3 million total broadband subscribers, including around 2.7 million subscribers on its fixed wireless service. The company reported 72,000 Fios Internet net additions, up from 61,000 Fios Internet net additions in the prior year’s quarter. 

Verizon’s third-quarter operating income declined 5.3% year-over-year to $7.47 billion. Its net income was $4.88 billion, a decrease of 2.8% from the prior year’s quarter. The company posted an adjusted EPS of $1.22, surpassing the consensus estimate of $1.18, but down 7.6% year-over-year.

The company’s adjusted EBITDA for the quarter grew 0.2% year-over-year to $12.20 billion. Its year-to-date cash flow from operations was $28.80 billion, up from $28.20 billion in 2022. Also, free cash flow year-to-date totaled $14.60 billion, an increase from $12.40 billion in the prior year.

VZ’s unsecured debt as of the end of the third quarter decreased by $4.90 billion sequentially to $126.40 billion. At the end of third-quarter 2023, the company’s ratio of unsecured debt to net income (LTM) was nearly 5.9 times, and its net unsecured debt to adjusted EBITDA was approximately 2.6 times.

Raised Free Cash Flow Guidance

“We continued to make steady progress in the third quarter with a clear focus on growing wireless service revenue, delivering healthy consolidated adjusted EBITDA and increasing free cash flow,” said Verizon Chairman and CEO Hans Vestberg. 

After reporting solid third-quarter results momentum, Verizon raised its free cash flow guidance for the full year 2023. The company expects free cash flow above $18 billion, an increase of $1 billion from the previously issued guidance. Cash flow from operations is expected in the range of $36.25 billion to $37.25 billion.

In addition, for 2023, the company expects total wireless service revenue growth of 2.5% to 4.5%. Its adjusted EBITDA and adjusted EPS are projected to be $47-$48.50 billion and $4.55-$4.85, respectively.

Attractive Dividend

On December 7, VZ declared a quarterly dividend of 66.50 cents ($0.665) per outstanding share. The dividend is payable on February 1, 2024, to Verizon shareholders of record at the close of business on January 10, 2024.

“We are committed to delivering value to our customers and shareholders as we execute on our focused network strategy,” said Hans Vestberg. “Our financial discipline and strong cash flow continue to put the company in a position for the Board to declare a quarterly dividend.”

Verizon has around 4.2 billion shares of common stock outstanding. The company made more than $8.2 billion in cash dividend payments in the last three quarters.

VZ pays an annual dividend of $2.66, which translates to a yield of 7.13% at the current share price. Its four-year average dividend yield is 5.42%. The company has raised its dividend for 17 consecutive years, the longest current streak of dividend increases in the U.S. telecom industry.

Progress in 5G Network Buildout

On December 21, Verizon announced the expansion of its reliable 4G and high-speed 5G service throughout Florida, Kennesaw, GA, and Aiken County, SC, among other areas.

This service is part of the company’s massive multi-year network transformation, which has not only brought 5G service to more than 230 million people and 5G home internet service to nearly 40 million households but has also added more capabilities, upgraded the technology in the network, paving the way for personalized customer experiences and offering a platform for enterprises to boost innovation.

According to a report by Grand View Research, the global 5G services market is projected to reach $2.21 trillion by 2030, expanding at a CAGR of 59.4% during the forecast period (2023-2030). Meanwhile, North America 5G services market is expected to grow at a CAGR of 51.6% from 2023 to 2030.

The growing demand for high-speed data connectivity worldwide, rising investments in 5G infrastructure, and rapid integration of advanced technologies like IoT and AI are estimated to propel the adoption of 5G services. Verizon is well-positioned to capitalize on the significant 5G adoption and fixed wireless broadband network momentum.

Fierce Competition

While Verizon continues to accelerate the availability of its 5G ultra-wideband network across the country, the company faces heightened competition from wireless industry players, including AT&T, Inc. (T), T-Mobile US, Inc. (TMUS), Vodafone Group Plc (VOD), and SK Telecom Co., Ltd. (SKM).

Mixed Historical Growth

VZ’s revenue grew at a CAGR of 1.5% over the past three years. But its EBIT decreased at a CAGR of 0.3% over the same period. The company’s net income and EPS improved at CAGRs of 4.5% and 4% over the same time frame, respectively.

Further, the company’s levered free cash flow increased at a CAGR of 20.1% over the same period, and its total assets improved at a CAGR of 9%.

Robust Profitability

VZ’s trailing-12-month gross profit margin and EBIT margin of 58.69% and 22.87% are 20% and 183.1% higher than the industry averages of 48.90% and 8.08%, respectively. Likewise, the stock’s trailing-12-month net income margin of 15.58% is significantly higher than the industry average of 3.21%.

Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 22.56%, 7.04%, and 5.43% are considerably higher than the respective industry averages of 3.41%, 3.55%, and 1.24%. Its trailing-12-month levered FCF margin of 13.31% is 73.9% higher than the industry average of 7.65%.

Mixed Valuation

In terms of forward non-GAAP P/E, VZ is currently trading at 7.95x, 49.1% lower than the industry average of 15.62x. The stock’s forward EV/EBITDA of 6.96x is 20.3% lower than the industry average of 8.73x. Also, its forward Price/Book and Price/Cash Flow of 1.57x and 4.23x compared to the industry averages of 1.99x and 10.03x, respectively.

However, the stock’s forward non-GAAP PEG multiple of 32.47 is significantly higher than the industry average of 1.54. Its forward EV/Sales of 2.49x is 34.7% higher than the industry average of 1.85x.

Analyst Price Targets

On December 19, Oppenheimer analyst Timothy Horan maintained a Buy rating on VZ and set a price target of $43 on the stock. In addition, Verizon received a Buy rating from Citi’s Michael Rollins in a report issued on December 13. However, Well Fargo maintained a Hold rating on VZ’s stock.

Bottom Line

Verizon’s disciplined approach to driving strong cash flow, operating the business, and serving its customers allowed it to raise its dividend for the 17th consecutive year.

However, analysts appear bearish about the telecom company’s near-term prospects. Verizon’s revenue and EPS growth will likely face challenges, and this slowdown is primarily attributed to fierce competition from leading industry players such as AT&T and T-Mobile, which are consistently undergoing significant changes in their operations.

Given slowing revenue and EPS growth, heightened competition, and mixed valuation, it seems prudent to wait for a better entry point in this stock.