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.
UPS Delivered a Double Beat in Q3
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.
Turnaround Efforts Are Producing Results for UPS
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.
UPS’ Big Dividend Is Viable
UPS’ outsized dividend yield is another factor that I like about the stock. This is because its 4.9% yield is approximately four times greater than the 1.2% provided by the S&P 500 index (SPY). That means investors can be patient with UPS as it continues to work toward executing its strategy to return to consistent growth.
In the meantime, the dividend also looks to be fairly safe. Assuming a token 0.6% increase in the quarterly dividend per share to $1.64 for 2025, the adjusted EPS payout ratio would be right around 75%. By 2026, the payout ratio could further improve to less than 66%. In my view, this creates a path for UPS to begin delivering small annual dividend growth beginning in 2027, which would arguably be a nice mix of immediate income and future income.
The Balance Sheet Is A-Rated
Despite its ongoing turnaround, UPS’ financial health is another positive supporting my bullish take. The company’s interest coverage ratio through the first nine months of 2024 registered at 24.4 times. For more color, this is down meaningfully from the year-ago period interest coverage ratio of 43.3.
Nevertheless, as cost-cutting efforts start to fully show up in the quarters ahead, this interest coverage ratio should rapidly rise once again.
At any rate, UPS’ interest coverage ratio, as it stands, already points to a business that can handle its financial obligations without encountering a solvency crisis. That is why the company possesses an A credit rating from S&P Global (SPGI).
UPS Stock Currently Offers Value
Despite UPS’ progress, the firm still looks undervalued. That’s yet another reason behind my optimism toward the stock. UPS’ forward P/E ratio of 15.2 is less than its 10-year average P/E ratio of 18.4. As the company keeps plugging away at its cost-savings programs and restores growth, I believe that the valuation multiple could return to the high teens, thereby providing an opportunity for upside.
What Does Wall Street Think?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on UPS. Out of 19 analysts, eight have assigned Buy ratings, 10 have issued Hold ratings, and one has assigned a Sell rating in the last three months. In addition, the average 12-month price target of $143.12 per share implies that UPS could appreciate 7.39% from current price levels.
Investment Summary
The financial markets are skeptical to reward UPS with a higher valuation multiple just yet. However, I suspect that as the company posts healthy results in 2024 and 2025, the narrative could quickly shift in UPS’ favor. As I wait for this to play out, 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.
