Is United Parcel Service Stock a Buy?

On the surface, United Parcel Service (NYSE: UPS) doesn't look like the type of company you would expect to struggle. Founded in 1907 and going public in 1999, the Atlanta-based logistics giant is a ubiquitous presence in America's package delivery market -- an opportunity that continues to expand as more people turn to online shopping.

But while the overall opportunity is expanding, UPS is seeing its market share slowly erode as competition intensifies. Shares have dropped an alarming 44% over the last five years. Let's dig deeper to see if this dip is a buying opportunity or the start of an even longer-term decline.

What went wrong for UPS?

When UPS went public roughly 26 years ago, it was the largest initial public offering (IPO) in the world with a starting valuation of $60.2 billion. Over the next two decades, the company benefited from the rising popularity of online shopping as e-commerce platforms like Amazon and eBay drove up the volume of small parcel shipments to residential households.

UPS outcompeted public sector delivery services like the United States Postal Service (USPS) because of its focus on higher-value shipments, air cargo capability, and large corporate accounts, which relied on its networks to deliver all or most of their packages.

However, this business model began to unravel as Amazon started investing in building out its own logistics network, rerouting its less desirable traffic to third parties. In response, UPS' leadership began to rethink its relationship with the retailer. Despite high volumes, these packages generate little profit.

UPS' management plans to shrink its Amazon delivery volumes by over 50% by the second half of 2026 as it aims to pivot to better opportunities. However, many investors are reacting to the move with alarm because it will lead to substantial downsizing, slower growth, and potentially fewer economies-of-scale advantages, which are crucial in logistics.

UPS' earnings remain weak

While the full impact of UPS' partial divorce from Amazon is yet to be seen, the company's financial results leave much to be desired. Third-quarter U.S. domestic revenue dropped by 2.6% year over year to $14.2 billion, driven by an expected drop in volume, while the segment's operating profits fell 28% to $603 million. Consolidated financial results (which include the international segment and supply chain solutions) aren't faring much better, with revenue down 3.7% to $21.4 billion.

Image source: Getty Images.

Management sees the near-term weakness as a temporary setback as it executes a longer-term pivot to higher-margin opportunities like healthcare logistics, where clients are willing to pay higher prices for more specialized service.

UPS has dramatically expanded its footprint in this niche, renting out 100,000 square feet of laboratory space in Louisville, Kentucky, to let medical companies set up shop near its central air cargo hub. The proximity allows them to quickly deliver samples, test results, and medication to residential consumers around the country.

While UPS is investing in healthcare, it is downsizing the other parts of its business -- cutting a whopping 48,000 jobs since last year, with the majority of layoffs affecting drivers and warehouse workers.

Is UPS stock a buy?

The most attractive thing about UPS stock right now is the dividend, which offers an impressive yield of 7.07%, trouncing the S&P 500 average of 1.17%. The payout has been increased every year for 16 years, which suggests management is relatively committed to the program. And with a forward price-to-earnings (P/E) multiple of just 12.6, the stock is remarkably affordable compared to the market's estimate of 22.

However, when you zoom out, you realize that sometimes a big dividend is just not enough. UPS went public at a market value of $60.2 billion. Twenty-six years later, the company is worth just $79 billion, a gain of only 31% over two-and-a-half decades. And that's not even including inflation. Investors will probably enjoy a better total return by buying an index fund.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, United Parcel Service, and eBay. The Motley Fool has a disclosure policy.