It's been tough going for United Parcel Service (UPS 0.64%) lately. The stock is down more than 21% over the past year compared to a 31% gain in the S&P 500. Last year was the company's worst in a while and included multiple earnings misses -- a complete flip from the torrid growth rate UPS was on during the worst of the pandemic. To make matters worse, UPS guided for weak 2024 results, causing the stock to sell off heavily in January as a result.
The stock had recovered since then, but then management's 2024 Investor and Analyst Day presentation on March 26 confirmed that the package delivery company is in a prolonged slowdown. UPS stock suffered a more than 8% sell-off in response to the guidance and is now within 10% of its three-year low.
Here's why UPS is struggling, why growth should return, and why the high-yield dividend stock is worth buying now.
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The downturn is real
The 2024 Investor and Analyst presentation provided valuable insights into where UPS is and where the company expects it is headed. But it also confirmed that the downturn is very real and not going away anytime soon.
There are several ways to rationalize the slowdown in package deliveries -- whether that's inflation, geopolitical tensions, supply chain disruptions, or tight consumer spending. No matter the cause, it is now clear that UPS overexpanded its network and overestimated the growth of delivery volumes, particularly small packages.
UPS expects the average daily volume (ADV) of the U.S. small package market to be about 98 million by 2026, or about $22 in revenue for package for $215 billion in total revenue. That estimate calls for a 5.5% compound annual growth rate from 2023 ADV to 2026 ADV -- which isn't bad. But it is a far cry from the company's 2021 projections. Back then, UPS expected 2023 ADV to be a whopping 108 million -- which was a significant miscalculation.
UPS expects revenue to grow from $91 billion in 2023 to between $108 billion and $114 billion by 2026. It expects $10.1 billion in growth from its U.S. domestic business, $2.3 billion from the international business, $4.6 billion from supply chain solutions, and $6 billion from inorganic growth. These 2026 targets seem achievable even if the package delivery industry remains challenged.
The company is forecasting $17 billion to $18 billion in capital investments between 2024 and 2026, including $8 billion in maintenance, $6 billion in its network of the future, $2 billion in IT, $1 billion in healthcare, and $500 million in trade lane shifts.
Despite the slowdown, UPS has improved many facets of its core business, leveraged automation in its facilities, and consolidated hubs to drive efficiency. The downturn looks bad in the short term, but the company is laying the groundwork for a successful turnaround.
Stock buybacks fall in priority
UPS has raised its dividend for 15 consecutive years, including a 49% jump in early 2022. The company downplayed its dividend during its 2024 Investor and Analyst presentation. It is targeting a payout ratio of 50% of adjusted prior year earnings per share -- but the dividend is currently higher than that range.
Management also said that share repurchases are the fourth priority behind reinvesting in the business, growing the dividend, and maintaining a strong balance sheet.
Given the slowdown across the business, it is probably best if UPS makes minimum raises and buybacks, and then accelerates its capital return program in 2027. After all, the stock yields 4.5% -- which is already a very competitive payout that is more than triple the yield of the S&P 500.
UPS is worth the wait
UPS stock has deserved a lot of its sell-off. The business is not doing well and isn't expected to improve until 2025. However, the 2026 targets are reasonable, and the turnaround should work out. Without the 4.5% dividend yield, it would probably be best to keep UPS on a watch list and give the turnaround time to play out. But the dividend is manageable, and UPS said it is committed to the dividend -- so it's unlikely it would ever cut it.
With the annual dividend at $6.52 per share, investors can expect nearly $20 per share in dividends over the next three years -- and that's assuming no raises. That's a nice incentive to simply buy the stock and wait for the turnaround to play out. UPS will look too cheap to ignore if its revenue and margins are as high as it expects in 2026.
The stock could fall further as impatient investors jump ship. But this is the kind of high-yield dividend stock that is worth buying and holding, especially when sentiment is negative, but the future is bright.
