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Rising Costs Impact UPS Shares

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Shares of UPS (ticker: UPS) have experienced a decline, potentially due to concerns over rising costs. However, investors should not overreact as the increase in costs was expected.

On Tuesday, UPS announced that it had reached a five-year agreement with the Teamsters union, representing approximately 330,000 UPS employees in the U.S. The agreement is subject to voting and changes by union members.

UPS CEO Carol Tomé stated, “This agreement continues to reward UPS’s employees with industry-leading pay and benefits while ensuring our competitiveness, customer service, and overall business strength.”

Share Performance

Initially, shares of UPS were rising but have since turned lower, currently down about 2% at $184.47 per share in afternoon trading on Tuesday. In comparison, the S&P 500 and Dow Jones Industrial Average are up 0.3% and 0.2%, respectively. FedEx (FDX) stock has also experienced a decline, down approximately 0.7% at $256.98.

Impact of Cost Increases

The decline in stock prices could be attributed to increasing costs. The Teamsters leadership referred to a $30 billion value for the deal. However, without additional details regarding sales, productivity, and benefits, this figure should not cause undue concern.

According to the union’s announcement, the new contract is deemed historic and offers numerous benefits to workers. It includes wage increases for all employees, the creation of more full-time jobs, and various workplace protections and improvements.

Under the agreement, existing full-time and part-time UPS union members will receive an additional $2.75 per hour in 2023 and an additional $7.50 per hour over the course of the next five years. UPS hourly wages typically range from roughly $15 to $30.

This equates to an average yearly increase of approximately 6.5%. The Teamsters and UPS have not yet responded to requests for comment on these increases.

General Wage Increases for Part-Time Workers at UPS

General wage increases for part-time workers at UPS are set to double compared to the previous contract, according to a statement from the union. This increase is in response to the higher levels of inflation today compared to when the previous contract was negotiated in 2018.

Inflation has been on the rise, with an average annual rate of about 1.5% in the years leading up to the 2018 negotiation. However, over the course of the current contract, inflation has averaged around 4% per year. In fact, consumer price inflation reached its peak in June 2022 at nearly 9%.

Alongside the wage increases, Teamster members will now have the freedom to enjoy their scheduled off-days without being required to work. Additionally, they will receive Martin Luther King Day as a holiday for the first time.

While these changes may result in increased costs for UPS, it comes as no surprise, as investors already anticipated this. Despite a slight dip on Tuesday, UPS stock has seen a 7% increase over the past month. In comparison, FedEx stock has risen by 10% during the same period, while the S&P 500 has added 6%.

The Teamsters General Secretary-Treasurer, Fred Zuckerman, expressed satisfaction with the outcome, stating that UPS was on the verge of a strike but they were able to stand firm on their demands. Zuckerman believes that this new national contract significantly levels the playing field for workers, which is a significant achievement in his over 40 years of representing members at Worldport—the largest UPS hub in the country.

It’s important to note that the current labor contract expires on July 31, and a strike could potentially occur on August 1 if an agreement is not reached.

Investors will now observe whether Wall Street’s earnings estimates for UPS will change in the coming weeks. However, the impact is not expected to be too severe since various factors such as pricing, the economy, and wages all contribute to the company’s overall results. For 2023 and 2024, Wall Street projects earnings per share of $10.69 and $11.76, respectively.

Looking ahead, investors will also monitor the upcoming negotiations between auto makers General Motors (GM), Ford Motor (F), and Stellantis (STLA) as their current labor deal expires in September.

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