A Logistics Giant on the Rise: Why UPS Deserves a Closer Look
United Parcel Service (UPS) has been a household name for decades, but its recent struggles have left investors wondering if the company can regain its footing. As someone who believes in investing in great dividend stocks during turnarounds, I’m excited to share why I think UPS is poised for a comeback.
A Pandemic-Driven Surge Gives Way to a Sell-Off
When COVID-19 hit, UPS saw a surge in package volumes, but this temporary windfall eventually gave way to a 31% decline in shares over the past three years. However, I believe this sell-off presents an opportunity for investors to get in on a company with a solid dividend yield and capital appreciation prospects.
Third-Quarter Earnings Bring Hope
On October 24th, UPS shared its third-quarter earnings results, which provided a much-needed boost to my bullish thesis. The company’s total revenue increased by 5.6% year-over-year to $22.2 billion, driven by volume growth of $1.1 billion (6.5%) in the U.S. Domestic segment. Adjusted earnings per share climbed by 12.1% over the year-ago period to $1.76, comfortably exceeding analyst consensus.
Cost Management and Efficiency Efforts Pay Off
UPS’ cost management efforts are starting to bear fruit, with cost per piece in the U.S. Domestic segment declining by 4.1% in the quarter. This helped the company’s non-GAAP net profit margin expand by almost 40 basis points to 6.8%. The Fit to Serve program, designed to optimize and right-size its management structure, is progressing well, with the firm aiming to reduce 12,000 positions. The Network of the Future initiative is also making strides, with 45 operational closures, including nine full buildings shut down this year, expected to save $3 billion by the end of 2028.
U.S. Domestic Daily Volume Trends Upward
UPS’ U.S. Domestic daily volume is trending in the right direction, with the second consecutive quarter of growth. Q3 2024 saw the highest year-over-year average daily volume growth rate since Q1 2021. This combination of topline and bottom-line performance explains why analysts expect adjusted EPS to rise by 16.8% to $8.76 in 2025 and by 14.7% to $10.05 in 2026.
Attractive Dividend Yield and Financial Health
UPS’ outsized dividend yield of 4.9% is approximately four times greater than the 1.2% provided by the S&P 500 index. This means investors can be patient with UPS as it continues to work toward executing its strategy to return to consistent growth. The dividend also looks to be fairly safe, with an adjusted EPS payout ratio expected to be around 75% in 2025 and less than 66% in 2026. UPS’ financial health is another positive, with an interest coverage ratio of 24.4 times and an A credit rating from S&P Global.
Undervalued and Poised for Upside
Despite its progress, UPS still looks undervalued, with a forward P/E ratio of 15.2 less than its 10-year average P/E ratio of 18.4. As the company continues to plug away at its cost-savings programs and restores growth, I believe the valuation multiple could return to the high teens, providing an opportunity for upside. Wall Street analysts have a Moderate Buy consensus rating on UPS, with an average 12-month price target of $143.12 per share implying a 7.39% appreciation from current price levels.
A Buy Rating for UPS
As I wait for UPS’ narrative to shift in its favor, I’m content to collect market-crushing income with modest future growth potential. For these reasons, I’m starting coverage with a Buy rating for UPS.
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