After United Parcel Service(NYSE: UPS) reported its third-quarter results before the opening bell last Thursday, shares of the package delivery giant popped by 5.3%. And while the price moderated a bit in the days since, they were still up by more than 4% from last Wednesday's close on Monday morning.
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The report offered meaningful signs that the company is turning the corner. And with a whopping 4.7% yield, UPS offers investors a compelling source of passive income and a worthy incentive to hold the stock while the business gets back on track.
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A low bar
Going into its earnings announcement, UPS stock was trading less than 7% above its four-year low. So even after last week's pop, the stock is still down big from its all-time high, and has drastically underperformed both its peer FedEx and the broad-based S&P 500 index in recent years.
A number of factors have been holding UPS back. The company experienced a steep surge in demand during the COVID-19 pandemic, and management expected that much of that new demand would persist even after social-distancing needs faded. It badly overestimated where small package delivery volumes were headed. This past March, UPS admitted that mistake and reset expectations with a new three-year plan. But the damage was already done regarding overspending and overexpanding shipping routes.
Also dragging on UPS was the extended battle it engaged in with its own workers last year. It had a contentious contract renegotiation with the Teamsters Union, which represents around 330,000 UPS workers. While the company eventually signed a new five-year contract with the union last summer, the labor dispute came close enough to a strike that many UPS customers shifted their business to rival shippers to avoid the threat of business disruption. And now, the higher initial cost structure of that new contract is impacting UPS's near-term earnings.
The transportation industry has generally been under pressure over the last few years due to inflationary and demand pressures. Even FedEx lowered its full-year guidance amid weakness in the industrial economy. And when railroad giant Union Pacific reported its Q3 earnings late last week, it came up a little short of expectations, and management cited a tough macroeconomic environment as the reason why.
The package deliverer is underdelivering
Last week's jump in UPS stock was driven more by a relief that the worst is over than by any signs that the company is firing on all cylinders again. "On our last earnings call, we said that the second quarter would not only be the bottom, but a turning point for our performance, and that we would return to revenue and profit growth in the third quarter, which we did," said CEO Carol Tome in the earnings presentation.
Despite that achievement, UPS lowered its full-year consolidated revenue outlook to $91.1 billion, down from its previous estimate of $93 billion. However, UPS now expects a consolidated non-GAAP adjusted operating margin of 9.6% up from its previous forecast of 9.4%.
If we go back to January when UPS reported its fourth-quarter 2023 earnings, its full-year 2024 guidance was for $92 billion to $94.5 billion in revenue and an adjusted operating margin of 10% to 10.6%. So based on its latest guidance, UPS is now expecting to deliver sales and margins below the low end of the initial estimates -- not good by any means.
On the Q3 earnings call, UPS noted that while it has historically excelled during peak package delivery times, 2024's holiday season may be more challenging than usual. That's because the number of shipping days between Black Friday and Christmas Eve is the lowest since 2019. And demand may be somewhat weak this holiday season. "While our customers are still expecting a good holiday selling season, recently, shippers have tempered their volume expectations," said Tome.
All told, 2024 is set to be another overall disappointing year for UPS.
UPS has an excellent dividend
Wall Street hates uncertainty. And from an operational perspective, UPS has been overpromising and underdelivering for a few years now. The dividend has been one of the few consistencies that UPS investors have been able to count on.
In January, UPS said it would pay $5.4 billion in dividends in 2024, and its latest guidance confirms that goal. However, UPS has said on past earnings calls that investors shouldn't expect meaningful raises to the payout until the company's results improve and it gets its payout ratio down.
The main reason UPS sports such a high yield is because it raised its dividend by 49% in early 2022 after it achieved blowout results during the pandemic. The surge in UPS' stock price pushed its yield down below 2% at the end of 2021. That large dividend hike returned its yield to around 3%.
UPS Chart
Historically, UPS hasn't been an ultra-high-yield stock. In fact, its yield is near its highest level in 15 years because of the combination of that large dividend raise and the stock's sell-off.
UPS is still worth buying and holding
UPS is showing signs of a turnaround, but the stock price may remain under pressure until the company can better handle its forecasting. The good news is that patient investors are getting a great chance to buy and hold UPS at an inexpensive valuation, and they can collect a sizable amount of passive income too.
UPS sports a price-to-earnings ratio of 21.3 -- which isn't bad considering the company isn't at the top of its game. That valuation could start to look even more compelling if UPS can chart a path back toward earnings growth.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx and Union Pacific. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
