Is FedEx charting different course with board, incentive plan changes?

Less than two weeks into the tenure of new CEO Raj Subramanian, FedEx Corp. appears to be charting a new path.

FedEx (NYSE: FDX) announced Tuesday an array of changes that included the appointment of three new directors, a revised executive incentive plan and a 53% increase in the company’s quarterly dividend to $1.15 a share. 

More light will be shed on the significance of the moves at FedEx’s analyst and investor meeting June 28 and 29 in the company’s hometown of Memphis, Tennessee. However, the actions appear to telegraph a change in management’s priorities under Subramaniam, who became CEO on June 1.

V. James Vena, who served as chief operating officer at Union Pacific Corp. (NYSE: UNP) and Canadian National Inc. (NYSE: CNI), and Amy B. Lane, who sits on the board of retailer TJX Companies Inc. (NYSE: TJX), will join FedEx’s board as part of an agreement with D.E. Shaw Group, a shareholder activist organization and a large FedEx shareholder. A third director, who will be a mutual choice of FedEx and Shaw, will join the board at a later date. 

The board announcements may signal a new level of cooperation between FedEx and outside shareholders, which had been limited in part by the powerful specter of Frederick W. Smith, FedEx’s founder, former CEO and largest individual shareholder. Smith became executive chairman June 1 to make way for Subramaniam’s ascension to the CEO role.

As part of changes to the management long-term incentive plan over the next three fiscal years — fiscal 2023 began June 1 — FedEx will tie cash incentives to a ratio of capital expenditures to revenue. The target ratio will reflect what is expected to be lower capital expenditures over the next three fiscal years compared to prior years, FedEx said. The company had projected $7.2 billion in capital expenditures during fiscal 2022.

The dividend increase, which takes effect July 11 for shareholders of record on June 27, may be the most immediately eye-catching development. The 40 cents a share increase will boost FedEx’s annual dividend yield to 2.3%. In February, archrival UPS Inc. (NYSE: UPS) announced a 49% increase in its quarterly dividend.

The price of FedEx shares soared on the news. Shares closed up nearly $29 a share, up 14.4% on the trading session.

FedEx said the combined moves were part of a “long planned” strategy to enhance shareholder value. By boosting the dividend, lowering capex levels and adding a capex-to-revenue ratio to incentive targets, FedEx appears to be pivoting from a growth focus to a strategy that emphasizes taking cash out of the business, said Ravi Shanker, a transportation analyst at Morgan Stanley & Co., (NYSE: MS) in a Tuesday note. 

Smith has always focused on long-term growth, Shanker said. Because Smith is still very much a part of FedEx decision-making, Shanker wondered if the changes represent a meaningful shift in FedEx’s multi-decade approach to its business.

Increasing the company’s cash return without a corresponding boost in earnings is “likely not sustainable,” Shanker said. He said that the addition of Vena, who has boosted operating efficiency and asset utilization at two Class I railroads, may be helpful in guiding a network model like FedEx where some operating similarities exist.

Thomas Wadewitz, an analyst at UBS Securities LLC, said in a note that the moves point to “potential for significant changes in the strategies and focus” of the Subramaniam-led executive team. Wadewitz echoed the views of experts who believe Subramaniam will take critical steps to expand the margins at FedEx’s two main units: FedEx Express, its air and international business, and FedEx Ground, its ground-delivery division. 

One area of much discussion is the potential for integrating the two units, steps that some say could drive hundreds of millions, if not billions, of dollars in efficiencies to the bottom line. FedEx has kept its business units largely separate since its founding in 1971, though it is slowly starting to commingle their operations.

The announcement comes nine days before FedEx releases its fiscal 2022 fourth quarter and full fiscal year results.

Source: freightwaves - Is FedEx charting different course with board, incentive plan changes?
Editor: Mark Solomon