United Parcel Service Stock: Buy, Sell, or Hold?

United Parcel Service (NYSE: UPS) was once considered a safe blue chip stock, but it actually declined about 32% over the past three years. The S&P 500 index, which the delivery services company joined in 2002, rallied more than 29% during the same three-year period. Even with reinvested dividends, UPS delivered a negative total return of about 22%.

But could it be a good stock to buy and hold again as declining interest rates drive investors back toward high-yielding dividend stocks? Or should investors dump it and stick with more reliable companies that face fewer near-term headwinds?

Image source: UPS.

Why did UPS disappoint its investors?

The growth of UPS, as one of the world's largest courier services, can be gauged by its average daily package volume and average revenue per piece. It shipped a lot more packages throughout the pandemic in 2021, but its average package volumes declined in 2022 and 2023.

It offset that pressure by charging higher rates to grow its total revenue in 2022, but that strategy couldn't offset its declining package volumes in 2023. As a result, its revenue fell for the first time since 2009.

Data source: United Parcel Service; EPS = earnings per share.

UPS' slowdown was exacerbated by intense competition from FedEx (NYSE: FDX) and other courier services as well as intense macro headwinds for business and consumer spending. Inflation also compressed its margins by driving up its fuel and labor costs.

The Teamsters Union, which represents around 330,000 UPS workers, nearly went on strike last year, and the resulting fears drove many customers to ship their goods through FedEx and other couriers instead.

At the same time, rising interest rates inflated the yields of risk-free CDs and Treasury bills, which made dividend stocks like UPS less attractive. That's why its stock underperformed the S&P 500 by such a wide margin over the past three years.

The reasons to buy and hold UPS

The bulls still like UPS because its near-term headwinds are dissipating, its stock looks historically cheap, and it pays an attractive dividend. The U.S. Federal Reserve finally cut its benchmark interest rate for the first time in four years in September, which indicates inflation is cooling off and the economy is ready to grow again.

That's why UPS expects its business to warm up in the second half of 2024 as the macro environment improves and it serves more healthcare customers and small- to medium-sized businesses. It also successfully negotiated a new contract with the Teamsters in late August to avoid a strike. To balance out the higher costs from that new contract, UPS will lay off about 12,000 employees, invest in new logistics technologies, and automate more tasks.

UPS expects its revenue to rise 2% in 2024 -- which exceeds analysts' expectations for 1% growth -- as its core business recovers. However, analysts still expect its earnings per share (EPS) to decline 15% for the year as it absorbs its higher labor costs.

But for 2025, they expect its revenue and EPS to increase by 5% and 19%, respectively. Based on those expectations, the stock looks cheap at 15 times forward earnings. It currently pays a high forward dividend yield of 4.9% -- which is higher than the 10-year Treasuries' 4.1% yield -- and that gap should continue to widen as interest rates decline. UPS has also raised its dividend annually for 15 consecutive years.

The reasons to sell or avoid UPS

The bears will warn that UPS still faces intense competitive headwinds, its insiders are still net sellers, and its dividends might not offset its long-term declines. Stiff competition from FedEx, DHL, and other couriers will likely limit UPS' pricing power. FedEx also faces fewer labor issues than UPS because its workers aren't unionized.

Speaking of FedEx, analysts expect its earnings to grow 10% in fiscal 2025 (which ends in May 2025) and 16% in fiscal 2026, yet its stock still trades at 13 times forward earnings. It pays a lower forward dividend yield of 2%, but its stock price actually rose 20% over the past three years and generated a total return of 28%. So for investors looking for a long-term logistics play, FedEx might seem like a better overall investment than UPS.

That might be why UPS' insiders sold more than five times as many shares as they bought over the past 12 months. And while declining interest rates might make dividends more attractive again, there are still plenty of high-yielding stocks that beat UPS while generating more predictable earnings growth.

Should you buy, sell, or hold UPS?

UPS' low valuation and high yield should limit its downside potential, so it's still smarter to buy or hold it than to sell it. That said, it might not outperform the market or other better dividend stocks if it doesn't quickly resolve its near-term issues.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.