Title: My Top Divide Dollar-Generator: A High-Yield Stock Worth Buying Before the New Year Revisited
This year has been a success for many sectors and indexes, but package delivery giant United Parcel Service (UPS) has failed to keep pace. With a year-to-date decline of 20.1% and a 45.9% drop from its all-time high, UPS stands out as an underperformer. Let's delve into the factors driving this sell-off and whether this high-yield dividend stock is a worthwhile investment at its current price.
The Impact of Higher Interest Rates
UPS fell 7.5% last week and is now just a few percentage points away from its four-year low. Fears of longer periods of lower interest rates could trigger further sell-offs. Fed Chairman Jerome Powell's commentary from Dec. 4 offered positive news about the labor market, job growth, and household wealth, but also hinted at slightly higher inflation. With the economy in such a strong position, quick rate cuts may not be necessary, indicating potential challenges for UPS.
The U.S. small-package delivery market is currently dealing with excess capacity due to lower-than-expected delivery volumes in recent years. Lower interest rates could stimulate consumer spending and increase delivery volumes, alleviating excess capacity concerns. Conversely, higher interest rates could hinder consumer spending, leading to persistent challenges for UPS.
Fourth-Quarter and Full-Year Earnings Outlook
UPS' fourth-quarter and full-year 2025 results will be crucial to monitoring the company's progress and future prospects. During the company's Q3 earnings call, management emphasized its ability to succeed during the peak holiday season and its "six years of industry-leading service." However, this peak season is shorter due to fewer shipping days between Black Friday and Christmas Eve, which will require careful management to ensure successful delivery.
UPS Sales and Margins Trends
UPS' sales have been on a downturn, with a 2% drop year-over-year in Q3. Margins have also slipped to a 10-year low, but the company has demonstrated signs of improvement, including better volume growth from its U.S. domestic segment. This improvement coupled with elevated consumer and business confidence, as well as a strong labor market, have left room for optimism regarding UPS' turnaround.
Analyst consensus estimates call for $8.76 in 2025 EPS, representing 17% growth from 2024 EPS. Given the company's low P/E ratio of 14.3 based on 2025 earnings guidance, UPS is currently trading at a bargain. This value proposition becomes even more compelling when considering the company's track record of consistent dividend payments and its reputation as a high-yield dividend stock.
The Impact of UPS' Dividend Practices
UPS' high yield is primarily due to its underperforming stock price and the 49% dividend increase in 2022. While the company has been cautious in its dividend growth since the raise, it has committed to maintaining the dividend, with a target payout ratio of 50% over time. With earnings growth trends and management's commitment to maintaining the dividend, UPS should be able to continue paying out dividends without cutting the payout.
Final Thoughts on Buying UPS as a High-Yield Dividend Stock
UPS stands out as a compelling value investment opportunity for income-oriented investors. Despite challenges in 2024, analysts anticipate a strong earnings recovery in 2025, which promises sustained dividend growth. Additionally, UPS' cost-saving measures, revenue improvements, and attractive valuation further bolster its appeal as a high-yield dividend stock. Keep an eye on the company's FQ4 and full-year 2025 earnings report on Jan. 30 to gain a clearer picture of its progress and future prospects.
In light of the potential impacts of higher interest rates, investors might be cautious about investing in UPS due to its sensitivity to consumer spending. With higher interest rates potentially reducing consumer spending, UPS' financial performance could face further challenges. (finance, investing, money)
Despite UPS' current underperformance, its high dividend yield of 14.3 based on 2025 earnings guidance makes it an attractive option for income-focused investors. The company's commitment to maintaining its dividend, along with its low P/E ratio, presents a compelling value proposition. (finance, investing, money)
