UPS (UPS) stock had a turbulent 2024, shedding 20% of its value and underperforming the S&P 500 index by a wide margin. On the one hand, the stock’s decline reflects investor concerns about several macro-economic headwinds and company-specific issues. On the other hand, the pullback has opened an attractive opportunity for income-focused investors. With shares now offering a record-high dividend yield of 5.06%, UPS stock appears to be a strong candidate for value investors. For these reasons, I am bullish on UPS and its prospects.
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UPS Stock’s Underperformance
Despite my bullish outlook on UPS stock, there was plenty of negative sentiment surrounding the company and its shares in 2024. The negativity can be attributed to several challenges, both within the company and the broader logistics industry. One issue was the slowdown in manufacturing activity globally, which weighed on package volumes, especially in the U.S. and Europe. This trend impacted UPS’ earnings, with management talking about the falling industrial production and a shift in client preferences toward lower-margin services.
On top of that, UPS faced higher costs from its new labor agreement with the Teamsters union, which pushed up wage rates by double digits. Worse, these costs were front-loaded. However, they still materially impacted profitability in both Q1 and Q2. Intensified competition within the logistics space also increased, with archrival FedEx (FDX) benefiting from an uptick in volumes and market share gains.
This explains why FDX stock had a much stronger performance last year. Regardless, UPS stock did show signs of strength, particularly in areas such as healthcare logistics and international business-to-consumer, where demand remained strong.
An Income Opportunity for Investors
While UPS faced a challenging 2024, the stock’s pullback has created a compelling income opportunity, which is the foundation of my bullish outlook on the stock. This is because, following its decline, UPS stock offers a record dividend yield that is above its historic average. Along with the yield, UPS also has a respectable dividend history, which is why I view it as a trustworthy income play.
UPS has increased its dividends for 16 consecutive years and, importantly, has never cut its payouts since initiating it back in 1999. Even during periods of economic stress, such as the 2008 financial crisis, the company maintained its dividend at stable levels, as the chart below shows.
Additionally, UPS’ five-year dividend-per-share compound annual growth rate (CAGR) of 11.4% highlights a strong dividend growth record, and a commitment by management to adequately reward shareholders. I believe this trend is set to endure, as UPS’ payout ratio remains manageable and earnings are expected to rebound in 2025. Management’s current focus on optimizing costs and boosting productivity should bolster UPS’s ability to sustain dividend growth moving forward.
Robust Earnings and an Attractive Valuation
One might be skeptical about UPS’ earnings and dividend growth prospects in 2025, especially in light of the challenges the company faced last year. Yet, UPS’ challenges in 2024 have not diminished its long-term earnings growth potential.
Wall Street expects the company to report earnings per share (EPS) of $7.48 for Fiscal 2024, which would be a 14.8% drop year-over-year. Again, this decline can be attributed to various headwinds, such as higher labor costs and softer volumes in specific segments. Nevertheless, UPS’ Q3 earnings report highlighted emerging positives, including revenue and margin improvements that were powered by operating efficiencies and a more favorable product mix. Its adjusted operating margin registered a 120-basis points climb to 8.9%
Analysts expect a strong recovery to continue, with EPS expected to rebound and grow by 16.9% in Fiscal 2025 to $8.74. This estimate implies a payout ratio of 75%, adequately covering the current dividend. It also indicates shares are trading at an attractive valuation. At today’s stock price, this estimate implies a price-earnings (P/E) ratio of 14.4 times Fiscal 2025 earnings. This represents a discount, in my view, given UPS’ wide moat, scale, and ongoing focus on higher-margin segments such as healthcare logistics.
Is UPS Stock a Buy?
Wall Street analysts appear optimistic about UPS’ outlook following a prolonged decline. UPS stock currently has a consensus Moderate Buy rating based on eight Buys, 10 Holds, and one Sell recommendations made over the past three months. At $143.12, the average UPS stock forecast implies upside potential of about 13.49% from current levels.
For the best guidance on trading UPS stock, look to Oppenheimer’s (OPY) Scott Schneeberger. He is the most accurate and profitable analyst covering the stock (on a one-year timeframe), boasting an average return of 8.57% per rating and a success rate of 59%.
Conclusion
Despite a rough 2024 marked by macro-economic challenges, rising labor costs, and stiff competition, I believe that UPS has now emerged as a standout opportunity for income-focused investors. The stock’s pullback has resulted in a record-high 5.06% dividend yield, backed by a stellar history of payouts and growth. With cost optimization underway and a rebound in earnings projected for this year, I think UPS presents strong income prospects and a decent upside. This is particularly true at its current valuation, which offers both a margin of safety and the possibility for expansion.
