United Parcel Service UPS offers a current dividend yield of 4.8% compared with the industry’s 3.5%. The transportation company’s above-industry dividend yield is a huge positive for income-seeking investors. This highlights confidence in its cash flow and prospects.
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UPS has hiked its dividend five times in the past five years. This is encouraging, as stocks with a strong year-over-year dividend growth history often offer a greater scope of capital appreciation than simple dividend-paying stocks.
Given this background, the question that naturally arises is whether investors should buy UPS stock at current levels or wait for a better entry point. Let us delve deeper to answer the question.
UPS Rewards Shareholders Through Buybacks
Beside cheering investors with regular dividend payments, UPS is active on the buyback front. In 2023, UPS’s board approved a share repurchase authorization for $5 billion. Under the authorization, UPS repurchased 12.3 million shares for $2.2 billion. As of Sept. 30, 2024, the company had $2.3 billion available under the $5-billion authorization.
Strong cash flow generation is serving UPS well, allowing the company to remain committed to returning value to shareholders. UPS demonstrates financial strength with $5.3 billion in free cash flow in 2023. The company's annualized cash flow growth rate has been 5.1% over the past 3-5 years versus the industry average of 4.4%.
UPS’ Expansion Efforts Look Good
In a bid to expand its network, UPS announced earlier this year that it would acquire Estafeta, a Mexican express delivery company. Through this acquisition, UPS aims to capitalize on increased cross-border opportunities amid Mexico's manufacturing boom and global supply-chain shifts.
Per CEO Carol Tome, "Global supply chains are shifting, Mexico's role in global trade is growing, and Mexican SMB and manufacturing sectors are looking for reliable access to the U.S. market." The deal builds on a commercial agreement between the two companies in 2020. In August, UPS inked a deal with Ninja Van Malaysia to expand the reach of its express delivery services in Malaysia.
UPS Stock Inexpensive Relative to S&P 500
UPS’s valuation is attractive at the moment. In terms of the forward 12-month Price/Earnings ratio, UPS is trading at 15.63X, lower than the S&P 500’s 22.38X. reading is also below its median over the last five years. The company has a Value Score of A.
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UPS shares are slightly more expensive than its rival FedEx FDX, which trades at 14.34X.
Headwinds Facing UPS Stock
UPS has been suffering from revenue weakness as geopolitical uncertainty and higher inflation continue to hurt consumer sentiment and growth expectations. The weak demand scenario has led to a decline in the volume of packages shipped. The trimming of the current-year revenue forecast during the third-quarter 2024 earnings release indicates that top-line woes are unlikely to go away anytime soon.
The lower revenue view further highlights that UPS does not expect shipping activity to be buoyant in the final quarter of 2024 due to the slowdown in online sales in the United States, apart from soft global manufacturing activity.
We remind investors that while releasing third-quarter 2024 results last month, UPS trimmed its full-year revenue view to $91.1 billion from the $93 billion expected earlier. UPS completed the sale of Coyote Logistics, its freight-brokerage business, for slightly more than $1 billion to RXO Inc. RXO in September,
Labor costs, courtesy of the deal with the Teamsters union, are high, limiting bottom-line growth. Per UPS management, due to this deal, wage and benefit costs will increase, seeing a 3.3% compound annual growth rate for the next five years.
Amid revenue weakness, rising capital expenses as witnessed in UPS’s case are unwelcome and may dent profit margins. UPS’s high debt levels represent a further cause for concern.
UPS’s Price Performance: A Disappointment
Due to the headwinds mentioned above, UPS shares have not performed well this year, lagging its industry and rival FedEx on a year-to-date basis.
YTD Price Comparison
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Conclusion
Undoubtedly, the UPS stock is attractively valued, and shareholder-friendly initiatives attest to its financial bliss. However, given the headwinds mentioned in the write-up, we do not advise buying this Zacks Rank #3 (Hold) stock at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Investors should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s current Zacks Rank supports our thesis.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
