# United Parcel Service Inc. (NYSE:UPS)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

United Parcel Service Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 14.31%
0 DPS01 3.84
1 DPS1 8.63 = 3.84 × (1 + 124.67%) 7.55
2 DPS2 16.95 = 8.63 × (1 + 96.44%) 12.97
3 DPS3 28.51 = 16.95 × (1 + 68.20%) 19.08
4 DPS4 39.90 = 28.51 × (1 + 39.97%) 23.37
5 DPS5 44.58 = 39.90 × (1 + 11.74%) 22.84
5 Terminal value (TV5) 1,934.19 = 44.58 × (1 + 11.74%) ÷ (14.31%11.74%) 990.91
Intrinsic value of United Parcel Service Inc.’s common stock (per share) \$1,076.71
Current share price \$166.60

Based on: 10-K (filing date: 2020-02-20).

1 DPS0 = Sum of the last year dividends per share of United Parcel Service Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.37% Expected rate of return on market portfolio2 E(RM) 12.48% Systematic risk of United Parcel Service Inc.’s common stock βUPS 1.17 Required rate of return on United Parcel Service Inc.’s common stock3 rUPS 14.31%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rUPS = RF + βUPS [E(RM) – RF]
= 1.37% + 1.17 [12.48%1.37%]
= 14.31%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

United Parcel Service Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Dividends 3,341  3,189  2,928  2,771  2,649
Net income 4,440  4,791  4,910  3,431  4,844
Revenue 74,094  71,861  65,872  60,906  58,363
Total assets 57,857  50,016  45,403  40,377  38,311
Equity for controlling interests 3,267  3,021  1,000  405  2,470
Financial Ratios
Retention rate1 0.25 0.33 0.40 0.19 0.45
Profit margin2 5.99% 6.67% 7.45% 5.63% 8.30%
Asset turnover3 1.28 1.44 1.45 1.51 1.52
Financial leverage4 17.71 16.56 45.40 99.70 15.51
Averages
Retention rate 0.33
Profit margin 6.81%
Asset turnover 1.44
Financial leverage 38.98

Dividend growth rate (g)5 124.67%

Based on: 10-K (filing date: 2020-02-20), 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-25).

2019 Calculations

1 Retention rate = (Net income – Dividends) ÷ Net income
= (4,4403,341) ÷ 4,440 = 0.25

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 4,440 ÷ 74,094 = 5.99%

3 Asset turnover = Revenue ÷ Total assets
= 74,094 ÷ 57,857 = 1.28

4 Financial leverage = Total assets ÷ Equity for controlling interests
= 57,857 ÷ 3,267 = 17.71

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.33 × 6.81% × 1.44 × 38.98 = 124.67%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$166.60 × 14.31%\$3.84) ÷ (\$166.60 + \$3.84) = 11.74%

where:
P0 = current price of share of United Parcel Service Inc.’s common stock
D0 = the last year dividends per share of United Parcel Service Inc.’s common stock
r = required rate of return on United Parcel Service Inc.’s common stock

#### Dividend growth rate (g) forecast

United Parcel Service Inc., H-model

Year Value gt
1 g1 124.67%
2 g2 96.44%
3 g3 68.20%
4 g4 39.97%
5 and thereafter g5 11.74%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 124.67% + (11.74%124.67%) × (2 – 1) ÷ (5 – 1) = 96.44%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 124.67% + (11.74%124.67%) × (3 – 1) ÷ (5 – 1) = 68.20%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 124.67% + (11.74%124.67%) × (4 – 1) ÷ (5 – 1) = 39.97%