As part of my investing strategy, I sometimes like to buy great dividend stocks in the middle of turnarounds, which brings me to the logistics giant United Parcel Service (UPS). The company benefited from a surge in package volumes from the COVID-19 pandemic. However, that proved to be a temporary windfall, and shares have tumbled 31% in the past three years.
I believe this sell-off could be an opportunity for shareholders to get in on a company with a solid dividend yield and capital appreciation prospects, especially since UPS’ recent financial results provided hope that its plan to return the business to pre-COVID growth is working. As a result, I am initiating coverage on the stock with a Buy rating.
On October 24th, UPS shared third-quarter earning results that were constructive to my bullish thesis. The company’s total revenue increased by 5.6% year-over-year to $22.2 billion. For perspective, this came in just above the analyst consensus of $22.1 billion and was led by volume growth of $1.1 billion (6.5%) in the company’s U.S. Domestic segment. Furthermore, revenue was only partially offset by a $300 million reduction in revenue per piece (2.2%).
In addition, UPS’ adjusted earnings per share climbed by 12.1% over the year-ago period to $1.76. This comfortably exceeded the analyst consensus of $1.63. Cost management helped the company’s cost per piece in the U.S. Domestic segment decline by 4.1% in the quarter. This helped UPS’ non-GAAP net profit margin expand by almost 40 basis points to 6.8% and explains how adjusted EPS growth outpaced total revenue growth.
UPS’ ongoing actions look poised to keep the return to growth chugging along in the quarters ahead, which provides another boost to my bullishness. The company’s Fit to Serve program, designed to optimize and right-size its management structure, is progressing well. The firm is aiming to reduce 12,000 positions in order to adapt to changing market dynamics.
According to CEO Carol Tome, this is running slightly ahead of schedule. UPS’ Network of the Future initiative is also making strides in the right direction, with 45 operational closures, including nine full buildings that have been shut down this year. This initiative is expected to save $3 billion by the end of 2028 by diverting volume to automated package hubs.
Moreover, UPS’ U.S. Domestic daily volume is trending in the right direction, as evidenced by its second consecutive quarter of growth. For more context, 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.