This Under-the-Radar Dividend Stock Yields 6.2%. Is It a Buy?
Key Points
Income investors remain uncertain about whether UPS can maintain its high 6.2% payout level.
The company's turnaround is ongoing, with forecasts calling for continued steady earnings growth.
This points to improved dividend coverage and the potential for solid share price appreciation.
- 10 stocks we like better than United Parcel Service ›
United Parcel Service (NYSE: UPS), aka UPS, may be a famous company, but it is not necessarily a top choice among dividend stocks. Sure, shares in the parcel delivery company sport a high dividend yield of 6.2%, but concerns still linger about its ability to sustain such a high payout amid a years-long downturn.
Yet while UPS's 16-year dividend growth streak has ended, there's much merit in buying this stock today, both for its yield and for the potential for further upside from its ongoing turnaround.
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Investors remain on the fence about UPS
Over the past few years, UPS has been struggling to get over its post-pandemic hangover. While it has been getting better lately, the company has yet to hit its previous high-water mark for profitability. As seen in UPS's latest quarterly earnings, efforts such as pivoting away from low-margin Amazon orders toward higher-margin business customers are helping improve the bottom line.
But even as results beat expectations, investors reacted negatively. Again, concerns about future results and the dividend's future still linger.
Why dividend doubts are overdone
With annual dividend payments totaling $6.56 per share against forecasts calling for adjusted earnings of around $7.22 per share this year, UPS has a nearly 91% forward payout ratio. That ratio is well above what's considered healthy or sustainable.
Although UPS recently decided not to raise its payout, fears of a dividend cut remain. On the latest earnings conference call, CFO Brian Dykes reiterated plans to maintain the current payout rate. This suggests an opportunity to buy UPS today and collect its above-average yield while gaining exposure to the ongoing turnaround. Analysts remain confident in further improved results, with forecasts calling for earnings growth averaging around 7% between now and 2029.
Better yet, the stock could also rerate. UPS trades for 14.5 times forward earnings, while competitor FedEx trades for around 16 times forward earnings. If results meet current expectations and valuation converges, UPS, trading for around $105 today, could be trading north of $140 in three years' time.
Should you buy stock in United Parcel Service right now?
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and United Parcel Service. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.
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