This has been an excellent year for the broader index as well as the industrial sector, with all-time highs across machinery companies and defense contractors. But package delivery giant United Parcel Service(NYSE: UPS) has been noticeably absent from the rally. It is down 20.1% year to date at the time of this writing, and 45.9% from its all-time high.
Here’s what’s driving the sell-off and if the high-yield dividend stock is worth buying now.
Image source: Getty Images.
UPS fell 7.5% last week and is now just a couple of percentage points off its four-year low. A big reason for a further sell-off could be fears of lower interest rates for longer.
Federal Reserve Chairman Jerome Powell’s commentary from Dec. 4 included excellent news about the labor market, job growth, and household wealth, but also slightly higher inflation. With the economy in such great shape, there may be less need for the Fed to cut rates quickly, which could be bad news for UPS.
The U.S. small-package delivery market has excess capacity due to lower-than-expected delivery volumes in recent years. Lower rates could spur consumer spending and boost volumes, helping offset the excess-capacity burden. Whereas higher rates could keep consumer spending reserved.
A big test will come on Jan. 30 when UPS reports its fourth-quarter and full-year 2024 results. On its third-quarter earnings call from Oct. 24, management boasted about its ability to thrive during the peak holiday season and its “six years in a row of industry-leading service.”
But this peak season is shorter due to fewer shipping days between Black Friday and Christmas Eve. CEO Carol Tomé said the following on the earnings call regarding this year’s peak season:
In the U.S., we expect to deliver 2 million more packages than we did on peak day last year, but we’ll do it at a higher productivity rate. This will be possible due to efficiency improvements we’ve made over the years and the use of seasonal support drivers, many of which are experienced part-time UPSers who work inside our facilities. To sum it up, we’re ready to deliver another successful peak.
Despite challenges, management is guiding for a solid quarter. The company has been showing signs of improvement. Margins are off their lows, and UPS is seeing much-needed volume growth from its U.S. domestic segment. But as you can see in the following chart, the company’s sales have fallen over the last couple of years, and margins have collapsed to 10-year lows.
Analyst consensus estimates are calling for $8.76 in 2025 earnings per share (EPS) compared to $7.49 in 2024 EPS — representing 17% growth. So expectations are already set for UPS to continue its momentum into next year and chart a path toward a turnaround.
At $125.61 a share at the time of this writing, UPS stock has a price-to-earnings ratio (P/E) of just 14.3 based on 2025 earnings guidance. That’s dirt cheap even by UPS’ standards, as the company has averaged a median P/E ratio of 20.3 over the last 10 years.
Just as the company overexpanded its routes and capital spending in recent years, it also raised its dividend by more than it should have in hindsight. Its yield is high due to its underperforming stock price and because the company raised the payout by 49% in 2022. Pre-pandemic, it was a solid income stock, usually paying a yield of 2.5% to 3.5%. But UPS’ yield has ballooned to 5.2% — the highest level in company history.
Since the big raise nearly three years ago, UPS has taken a cautious approach to its dividend through minimal raises so the expense doesn’t get out of hand. It should be able to keep the dividend steady as earnings grow.
During the company’s first-quarter earnings call in April, management said that it is targeting a payout ratio of 50% over time but has no intention of cutting the dividend to get to that payout ratio. In fact, it intended to raise the dividend every year.
UPS is still a long way from a 50% payout ratio, but it could make a leap forward next year. Based on the company’s $6.52 per share dividend and the consensus analyst estimate of $8.76 in earnings in 2025, it would have a payout ratio of 74.4%. After a few more years of further earnings growth and minimal dividend raises, it could reach its 50% goal in the next three to five years.
Given the high yield, investors are likely more concerned with a cut in the dividend than how big the raises are. With earnings potentially heading in the right direction and management defending the dividend on past earnings calls, it looks like the payout should at least stay steady.
UPS stands out as a dirt cheap, high-yield value stock for investors willing to wait for the company to turn things around. However, an economic slowdown or higher interest rates could delay the recovery. And if things get really bad, investors should never completely rule out a dividend cut.
Still, the yield is so high, and the valuation is so low that there seems to be a considerable margin for error. But before hitting the buy button, some investors may want to tune into UPS’ next earnings call in January to see the results from the holiday quarter and the company’s expectations for 2025.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
