Is United Parcel Service Stock a Buy Now?

Key Points

• At its current share price, UPS has a 6.5% dividend yield.

• The company operates one of the largest package delivery services in the world.

• UPS is overhauling its business to focus on its most profitable customers.

• 10 stocks we like better than United Parcel Service ›

United Parcel Service (NYSE: UPS) is in the middle of a major corporate overhaul. That has required management to make hard choices, face down some difficult issues, and muddle through problems that were out of its control. Yet Wall Street still appears worried about the logistics giant's future, given that its stock price has fallen by about half over roughly the past three years.

What's wrong with UPS?

The list of issues that have investors worried about UPS is long, and it covers a lot of ground. There are legitimate reasons why Wall Street is downbeat on UPS' shares.

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For example, in 2023, the company signed a new contract with its 340,000 unionized workers. That led to a big increase in UPS' employee costs, which is not good for profitability. Since then, the company has been attempting to boost profitability by streamlining its operations and making greater use of technology. However, closing sorting facilities generally leads to write-offs, which also hurt profits. And big capital investments in technology cost money up front, too.

Image source: Getty Images.

Then there's the customer side of the equation. During the early stages of the coronavirus pandemic, demand for UPS's services was huge as social distancing efforts led to a sharp surge in the amount of shopping people did online.

Wall Street extrapolated that this higher level of demand would continue far into the future and bid up the company's stock accordingly. But effective vaccines were widely distributed, the public health emergency waned, and people largely resumed their former shopping habits. That meant demand for shipping softened, and investor sentiment around UPS turned deeply negative.

Further, UPS has been trying to focus more on its most profitable opportunities. In line with that strategy, it attempted to reduce the amount of business it does with lower-margin customers. While that makes sense in principle, Wall Street still didn't react well when UPS announced that it was going to materially reduce the amount of business it does with Amazon. The e-commerce leader is UPS' largest customer, so even though the sales it's giving up are low margin, the move worried investors.

In sum, there are plenty of reasons to be downbeat about UPS, which is why its stock has lost half its value, pushing its dividend yield up to a huge 6.5%.

Data by YCharts.

There's opportunity here for the intrepid

Buying shares of UPS is definitely not a low-risk decision, so only more aggressive investors should be considering it right now. For example, its high yield comes along with a dividend payout ratio that is frighteningly close to 100%. That said, companies can support payout ratios above 100% for short periods because dividends are funded out of cash flows, not earnings.

For conservative dividend investors, that high payout ratio might be a reason to avoid UPS stock, but for more aggressive types, it shouldn't be. That's because the business backing the dividend is actually getting better, not worse. Improved operations, higher quality customers, and the resolution of its issues with its workers are all positives for it if you think long-term. And considering the remarkable rise the stock experienced during the first two years of the pandemic, its subsequent drop back to around where it traded in early 2020 isn't nearly as shocking. It was really just Wall Street swinging from irrational exuberance about the business back to a more realistic view of things.

More to the point, UPS's underlying financial results are stabilizing, if not improving. While its revenue was basically flat year over year in the first quarter, that's what you would expect to see as the company reshaped its business. The big story is that earnings rose with the help of improved operating margins. That, too, is the outcome that investors would expect given the direction the company is moving in.

UPS is moving in the right direction, but there's more work to be done

So yes, UPS stock is out of favor for good reasons. But the company's leaders are executing on the plan they have laid out to improve the business so it can achieve long-term success. Transition periods are hard. At the same time, they can present opportunities for investors who think in decades and not days. Right now, more aggressive types might want to do a deep dive on UPS. It could be an attractive buy now, before the progress it is making gains more traction.

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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. Reuben Gregg Brewer 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 has a disclosure policy.