News / Who or what is putting the brakes on shareholder expectations at UPS?

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UPS has always done things its own way – everybody in the freight industry knows that. However, is it time for a change? Some elements suggest so.

In a month’s time, UPS will report its first-quarter results. They had better be really good, or shareholders may wonder whether their funds are being properly allocated.

Several asset managers are on the shareholder register – expect them to have rather a lot to say about the increased compensation package of chief executive David Abney, and they might also question whether UPS is striking the right balance between the growth in revenue and operating costs, including compensation and benefits.

“UPS on Tuesday said chief executive David Abney’s total compensation for 2014 more than doubled, including a base salary increase he received in September when he was promoted to the helm of the package-delivery giant,” The Wall Street Journal reported this week.

UPS said: “David’s base salary was increased to recognise the increased level of responsibility. No equity awards were granted at the time of David’s promotion to CEO.”

Mr Abney’s compensation package surged to $8.35m in 2014 from $4m a year earlier, with most of the increase coming from stock awards. His basic salary rose 35% to $674,546 from $499,494.

In absolute terms, that is not exactly a massive pay rise for a senior executive, it could reasonably be argued.

A more lucrative compensation package was long overdue, anyway, and Mr Abney needs some kind of incentive to fare better than his predecessor. Still, it strikes me as being a very generous emolument on a relative basis, considering that the growth in Mr Abney’s basic salary has outperformed UPS stock by 37 percentage points in less than seven months.

“In June 2014, we announced that an orderly transition in the chief executive officer role would take place in September 2014,” UPS added.

Scott Davis retired as chief executive, but remains on the board as non-executive chairman. During his tenure (from 1 January 2008), UPS stock has risen by 30%, which compares with +73% for FedEx and +42% for the S&P 500.

Vanity & sanity

In finance, sanity stands for net earnings, while vanity stands for revenues, and here is where UPS management has a lot of work to do, as proved by its latest profit warning in January, which pushed the stock price down by more than 10% in less than a week.

At that point, Mr Abney told investors that UPS’s fourth-quarter performance was disappointing – but how many times will shareholders have to hear such remarks in the next few quarters?

“Many” may be the answer, a senior City banker pointed out this week: “UPS has not turned the corner yet, and is miles behind FedEx.”

A US banker working in the transport industry suggested: “I wouldn’t be stunned if a management reshuffle took place on the back of a couple of dreadful quarters.”

That seems harsh, as well as an unusual – but not inconceivable – outcome at UPS.

Mr Abney should not be the only one to take the blame. He is faced with a tough market, but he is the man in charge, and the heart of the issue is this – group revenues have grown to $58.2bn, at a compound annual growth rate (CAGR) of 4.1% between 2010 and 2014, but has been outstripped by compensation and benefits and other operating costs, which have registered a CAGR of 4.9% over the same period. At $32bn, compensation and benefits, amount to 60% of UPS’s total operating cost base.

As a result, trends for pre-tax profit at UPS are just not good enough.

Core profitability, excluding investment income and expenses, has fallen 285 basis points since 2010. The operating pre-tax profit of its US domestic package unit is down 12% to $2.8bn over the last five years, while the international package unit – the most profitable business with a 12.9% margin (16.4% in 2010) – is down 8.4% to $1.7bn.

The smaller and less profitable supply chain and freight unit is the group’s worst performer, with a 24% plunge in operating pre-tax profit to $432m over the period.

Basic and diluted earnings per share are still a few cents below the level UPS reported five years ago. In 2010, however, the shares traded 40% lower – which is why UPS’s chief executive must pull a rabbit out of his hat now to convince shareholders to continue to back UPS.

The pressure is building. According to consensus estimates, the shares should be worth $10 more than their current value, but if recent trends are confirmed, it could soon be party time for the short sellers – and that’s a good enough reason as any for the company to think differently in the next few quarters.