Parcel delivery giant UPS (NYSE:UPS) has seen its fair share of difficulties as the extremely high shipping volumes it handled during the 2020-21 era have gradually tapered off.
Shares of the stock are down more than 30% in the last year alone, and both revenues and earnings have fallen off the highs they reached earlier in the 2020s.
Is now an amazing time to buy UPS, or does the company still have more challenges to work through before its stock can start to rebound?
A Quick Review of the Risks Around UPS
There are several reasons for the stark selloff UPS has experienced over the last year. Inflation, waning consumer confidence and geopolitical tensions were already weighing on the stock going into 2025. These risks were far more than theoretical, as UPS saw its revenues decline consistently from late 2022 through mid-2024.
Although things seemed to be looking up in the second half of last year, UPS once again posted declining revenues in Q1 of this year. Investor confidence that had already been stretched thin by multiple years of difficulties took an additional hit in April when the Trump administration revealed its plans to impose massive international tariffs.
The levies on packages being shipped from abroad are likely to put consistent downward pressure on the company’s volume, while the extra inflation created by the tariffs is apt to erode consumer spending.
The company’s challenges were still on display in its Q1 earnings report. Consolidated revenues for the quarter came in at $21.5 billion, down from $21.7 billion a year ago. A similar trend played out in the company’s EPS, which fell from $1.43 to $1.40.
How Is UPS Addressing Its Problems?
On paper, the plan UPS has outlined to turn itself around is fairly straightforward. Management plans to cut costs while increasing its focus on high-margin shipping, notably in markets like healthcare logistics. By reducing its expenses and increasing the amount it makes on each parcel shipped instead of simply targeting pure volume, UPS hopes to set itself back on track for earnings growth.
To this end, UPS is taking the somewhat drastic move of cutting its shipping volumes for Amazon by around 50%. The eCommerce giant still makes up over 10% of UPS’ total shipping volume, but the business from Amazon tends to be low-margin.
Amazon has also invested heavily in its own delivery and logistics network, introducing questions about how long UPS would be able to depend on its business. While the decision to shift away from high-volume, low-margin Amazon shipments could work out in UPS’ favor in the long run, there’s obviously a decent amount of risk involved with cutting back service to such a large customer.
UPS is also making cuts to both personnel and facilities to streamline its business for greater efficiency. This year, the company is planning to cut around 20,000 staff and close 73 facilities. These bold cuts are expected to save the company as much as $3.5 billion this year, in turn helping to raise earnings for shareholders.
UPS’ Outsized Dividend
One of the main considerations for investors looking at UPS today is its extremely high dividend yield. The stock is currently yielding 6.9%, more than five times the average of 1.3% that prevails among the stocks in the S&P 500. This puts UPS’ yield at an all-time historic high, far above even the yields it delivered during the selloffs associated with the 2008 financial crisis and the onset of the 2020-21 era.
The problem, though, is that the company may have difficulty delivering much in the line of dividend growth going forward if its headwinds persist. UPS already carries a dividend payout ratio of over 90%, stretching its ability to deliver further increases without additional growth. While it is still very solid, it could be in for a sustained period of difficulties. As such, investors who buy today run the risk of low dividend growth in the immediate future.
What Does UPS’ Valuation Look Like?
Like the dividend, the selloff UPS has experienced over the last year has also made its valuation more attractive.
Shares of the parcel giant currently trade at just 13.9x earnings, 0.9x sales and 15.2x operating cash flow. As recently as mid-2024, shares of UPS were trading above 20 times earnings, opening up the possibility that they may have corrected enough in a short period of time to make them undervalued.
It’s worth noting, though, that analysts are closely divided over whether UPS is a buy or a hold. 14 rate it as a buy, while 12 rate it as a hold. Only one analyst has offered a sell rating, a view that may be too bearish even with the challenges currently facing the company.
UPS Stock Forecast?
Shares currently trade at $95.37, and the consensus price target of $115.66 implies an upside in excess of 21%. This view is somewhat reflected in the crop of analyst price targets for UPS.
There’s little disputing the fact that the bumps in the road facing UPS are real and concerning. Although Amazon’s own delivery service has managed to overtake it in terms of the number of parcels shipped each year, UPS still accounts for about 21% of all parcels delivered in the United States.
Investors buying UPS at the moment also benefit from the combination of a somewhat low valuation and an extremely high dividend yield. Though both of these factors reflect the company’s higher-than-usual risks, UPS appears to be trading at a decent price and delivering enough dividend income to make it worth holding as the company attempts to improve its performance.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.