This Beaten-Down Dividend Stock Yields 6.5%. Here's Why It's Worth Doubling Up on in May.

A steep sell-off in the shares of United Parcel Service (NYSE: UPS) has pushed their yield up to 6.5% -- making it one of the 10 highest-yielding stocks in the S&P 500. But the high yield has come much to the dislike of long-term investors, who have seen UPS stock fall over 56% from its all-time high in February 2022.

Here's why it is failing to deliver for investors, but why the beaten-down dividend stock could be worth buying now.

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More weak results from UPS

UPS is off to a poor start in 2025. Consolidated revenue in its most recently reported quarter -- the 2025 first quarter -- was down slightly compared to a year ago. The adjusted consolidated operating margin was just 8.2%. And adjusted diluted earnings per share were $1.49, up just 4.2% year over year.

The poor results stem from a decline in both revenue and margins, driven by a lack of pricing power and lower volumes. In the quarter, U.S. average daily package delivery volume declined by 3.5% compared to a year ago.

When UPS reported its third-quarter 2024 results in October, it ended an 18-month drought by returning to revenue and profit growth, following a strong 2024 second quarter when it returned to volume growth. Investors were hoping that the turnaround was fully under way and the worst was behind it. But the recent quarter proved that the struggles are far from over.

Maintaining a long-term focus

UPS' stock price tends to follow its operating margins. As you can see in the following chart, the stock peaked in early 2022 when its margins and revenue were surging. But declines in revenue and the compressed margins have pushed the price down to around a 10-year low.

UPS data by YCharts; TTM = trailing 12 months.

Given the poor results, and overpromising and underdelivering on expectations, it makes sense that investors would grow frustrated and hit the sell button. However, there are signs that the company is turning the corner.

In March 2024, UPS hosted an investor presentation centered around its "Better and Bolder" strategy, which leans into high-margin segments like time- and temperature-sensitive healthcare shipments and small and medium-size business (SMB) package delivery volumes, rather than focusing solely on volume quantity.

The shift toward a more streamlined, higher-margin business comes with the risk of leaving revenue on the table. But if it executes the plan successfully, it could become a more flexible and efficient business, better capable of navigating economic challenges and capitalizing on growth in key markets like healthcare.

In January, UPS announced plans for a 50% reduction in shipment volumes with its largest customer, Amazon, by June 2026. UPS does a lot of delivery volume with Amazon, but these are mostly small packages that aren't high margin. On the first-quarter earnings call, CEO Carol Tomé said the following about the decision to reduce its business with Amazon:

Note that the volume we are transitioning out is Amazon's fulfillment center outbound volume. This volume is not profitable for us, nor a healthy fit for our network. The Amazon volume we plan to keep is profitable, and it is healthy volume. In other words, volume where we can add value like returns and seller fulfilled outbound volume.

The decision to reduce Amazon deliveries will likely lead to lower revenue but could be a net positive for the company in the long term. On its first-quarter 2025 earnings call, UPS said that January declines in average delivery volume were less than expected, thanks to volume growth from certain business-to-business, SMB, and healthcare customers. But uncertainty with global trade in February and March hurt consumer confidence and demand from some of its enterprise and SMB customers.

Put another way, the company may have been on track for a better quarter if trade tensions had not flared. If consumer confidence improves and trade talks continue progressing toward concrete resolutions, then it could turn the corner.

The dividend is on shaky ground

A key incentive to holding the stock through this period of volatility has been its ultra-high dividend yield, which is 6.5% at the time of this writing. Despite challenges with the underlying business, management has expressed confidence that it can support the payout.

However, with earnings and cash flow declining, the dividend is putting a lot of pressure on the company's balance sheet. As you can see in the following chart, UPS paid off debt as free cash flow (FCF) soared in 2021 and early 2022. But now, the dividend per share is higher than FCF per share, and the company's total net long-term debt has climbed.

UPS Net Total Long Term Debt (Quarterly) data by YCharts.

Given the poor performance by the stock, long-term investors may prefer that UPS cut its dividend so it can focus on executing its turnaround rather than appeasing investors in the near term. As Tomé said on the 2025 first-quarter earnings call, the company is executing the largest network reconfiguration in its history through the Amazon pullback.

Maintaining a large dividend expense during such a vulnerable period for the company may be doing more harm than good. After all, even if UPS cuts its dividend half, it would still yield over 3%, which is a solid figure.

Buying UPS stock for the right reasons

The stock is worth buying if you believe in the plan to focus on margin growth rather than volumes, and have the patience to endure economic uncertainty. First-quarter results weren't great. If the economy worsens, UPS could feel even more pain.

The company is holding true to its long-term growth strategy by building out its network to cater to high-margin volumes. UPS could have easily doubled back on this plan just to boost its near-term results. But management's commitment to margin growth is steadfast, which makes it easier to buy and hold the stock if you agree with the strategy.

The glass-half-full outlook on UPS is that the company will endure this challenging period, chart a path toward earnings growth, and that the stock is simply too cheap to ignore. Conversely, the glass-half-empty outlook is that UPS will continue straining its balance sheet unless it cuts its dividend because its turnaround will take longer than expected.

Some investors may prefer keeping UPS on a watch list until it delivers more consistent results. But the valuation has reached a point where the potential reward outweighs the risks. The stock has a price-to-earnings ratio (P/E) of just 14.8 and a forward P/E of 14.4, compared to a 10-year median P/E of 20.

When a company is priced at a steep discount to its historical valuation, it usually means that expectations are so pessimistic that even mediocre results would cause celebration.

Add it all up, and UPS has the makings of a worthwhile dividend stock to double up on in May, not for its ultra-high yield, but for where the business could be headed over the next three to five years.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.