FedEx Warns of Economic Slump but Dividend Profile Remains Strong

FedEx shares tumbled over 20% today after the company pre-announced quarterly earnings around 30% lower than expectations and warned that "macroeconomic trends significantly worsened" in recent weeks leading to a swift decline in global shipping volumes.

The firm's CEO even went as far as to suggest that we are heading towards a "worldwide recession," stating FedEx is "a reflection of everybody else's business, especially the high-value economy in the world."

These macroeconomic concerns led the company to withdraw guidance for the year and are being pointed to as the reason for today's broad market sell-off.

To combat a slowing economy, FedEx is accelerating cost-cutting measures, including closing certain FedEx Office locations, moderating capital spending, consolidating some package sorting operations, reducing Sunday operations, and instituting a hiring freeze.

These actions, plus FedEx's conservative payout ratio heading into the slowdown, should help protect the company's liquidity and dividend.

The logistics giant also has a solid BBB rated balance sheet with $6.9 billion in cash, compared to an annual dividend commitment of about $1.2 billion.

Given that FedEx generated positive free cash flow each year during the 2007-09 financial crisis and expects lower capital intensity going forward, the company should be in a decent financial position to continue supporting its dividend.

Considering FedEx's conservative payout and sturdy balance sheet, we are reaffirming the company's Safe Dividend Safety Score and expect the firm to continue its track record of paying uninterrupted dividends since 2002.

That said, if the impending economic challenges prove as daunting as management is warning, it may take a few years before earnings stabilize and FedEx's stock price recovers. 

If that's the case, investors have time to consider whether or not to invest while FedEx trades at a historically high dividend yield nearing 3%.

FedEx's valuation looks appealing, and the company's hard-to-replicate network of assets seems likely to remain relevant for years to come as the challenge of providing timely, affordable package delivery worldwide persists.

However, the stock will likely remain volatile as recession fears persist and may not rebound until there is evidence of sustained economic growth.

We will continue monitoring FedEx and provide updates if our outlook on the company's dividend changes.