UPS (UPS 1.10%) currently sports a dividend yield of slightly more than 4%, and it has good long-term growth stocks, but is it the kind of dividend stock investors should be buying? The answer is yes and no, depending on your tolerance for near-term risk. Here’s what you need to know before buying the stock.
Why buying UPS stock won’t suit you
Don’t buy UPS if you can’t stomach the potential for near-term risk. Package delivery companies are cyclical, meaning their delivery volumes and earnings depend on economic activity. In addition, customers often shift to lower-cost delivery options in periods of lower economic growth.
As shown below, UPS’s lower-cost ground service volumes and revenue declined significantly less than the higher-cost deferred and next-day air services. That led to revenue in the U.S. domestic package segment to decline by 6.3% in the first nine months compared to the same period last year.
|
UPS U.S. Domestic Package Margin |
Revenue Per Piece |
Change in Average Daily Package Volume (first nine months 2023) |
Revenue (first nine months) |
Revenue Change (first nine months) |
|---|---|---|---|---|
|
Next Day Air |
$22.31 |
(11.9)% |
$7,240 million |
(8.6)% |
|
Deferred |
$16.59 |
(22.2)% |
$3,491 million |
(15.3)% |
|
Ground |
$11.21 |
(7.4)% |
$32,312 million |
(4.7)% |
|
Total |
$12.59 |
(8.9)% |
$43,043 million |
(6.3)% |
Data source: UPS presentations. Change figures are year over year to the comparable period of 2022.
Unfortunately, there’s a risk that these negative trends could extend into 2024 because UPS chief rival FedEx disappointed investors with its second-quarter 2024 earnings and outlook for the rest of its financial year. The weakening trading environment led FedEx to lower its 2024 sales guidance to a low-single-digit decline from the previous guidance of flat sales in 2023.
Moreover, given that UPS’s fourth quarter — unlike FedEx, UPS’ financial year correlates with the calendar year — tends to be its highest revenue generator (it includes Thanksgiving and Christmas), UPS could miss its full-year 2023 expectations, let alone give lackluster outlook for 2024. Finally, these difficult near-term trends are reflected in Wall Street analyst estimates, which imply that UPS revenue won’t grow on a year-over-year basis until the second quarter of next year.
Data source: marketscreener.com.
Don’t buy UPS stock if you can’t tolerate the potential for some near-term bad news or don’t like holding a stock reporting negative growth.
Why you should buy UPS in 2024
A glass-half-full viewpoint sees things differently. There’s nothing wrong with UPS’s end markets that won’t be sorted out with lower interest rates taking the brakes off the economy. As noted, UPS is a cyclical company, and it often makes sense to buy such stocks when they are going through a trough period and have negative sentiment directed toward them.
In addition, UPS’s volume and revenue were hit by protracted labor negotiations in 2023. In a nutshell, customers diverted volumes from UPS’s network in fear of disruptions caused by potential strikes. While the diverted volumes hurt UPS in 2023, the company can grow in 2024 by winning back customers — and management believes it’s already doing so.
Image source: Getty Images.
However, the strongest argument for buying UPS stock as a dividend play is related to the sustainability of its dividend and the company’s ability to grow its earnings and cash flow over the long term. With 2023 likely a trough year for UPS, the market expects $6.1 billion in free cash flow, more than enough to cover the current dividend payout of $5.3 billion to investors.
As for UPS’s long-term growth prospects, despite a challenging year, the company is well on track to hit its growth targets in areas like healthcare and small and medium-sized businesses (SMBs). Meanwhile, management continues to invest in productivity-enhancing technologies like automation and smart facilities that help lower its cost per piece. Indeed, there’s a strong case for UPS being a more robust business in a year as it comes out of a slow economic period.
Is UPS stock a buy?
In summary, UPS undoubtedly faces some near-term headwinds, and cautious investors may want to hear management’s guidance for 2024 before buying the stock. On the other hand, it’s tough to time entry points into a stock. If you are comfortable with the long-term outlook and look forward to a 4% dividend yield, UPS is an ideal way to get some income and invest in a recovery play for 2024.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
