Investors looking for steady income shouldn't overlook this dividend stock, which offers a dividend yield of over 5% despite the recent downturn. While the company faces challenges, its long-term plans to increase profitability and shareholder returns remain strong, making it an attractive choice for dividend investors.

Company introduction

UPS $UPS (United Parcel Service) is a global logistics company that specializes in delivering packages, shipping goods, and providing a wide range of logistics services. The company is headquartered in Atlanta, Georgia, USA. UPS is one of the largest courier companies in the world, delivering packages and parcels worldwide. The company is known for its reliability, speed of delivery and extensive network of branches and distribution centers.

UPS History

UPS was founded in 1907 by two young entrepreneurs, James E. Cas and Claude Ryan, under the name American Messenger Company. The company originally offered a bicycle courier service in Seattle. In 1913, the company changed its name to Merchants Parcel Delivery and began to focus on parcel and package delivery, a significant step towards the modern form of UPS. In 1930, the company adopted its current name, United Parcel Service, and began expanding its services to other U.S. states.

Scope and global expansion

UPS has an extensive footprint, operating in more than 220 countries and territories worldwide. The company has a wide network of distribution centers and logistics hubs that enable fast and efficient delivery of shipments. In Europe, Asia, Latin America and other regions, UPS provides a wide range of services, including road, air and ocean freight.

Products and services

UPS offers a range of services to meet a variety of customer needs. The company's primary service is package delivery, both for individuals and businesses. The most used services include express delivery, next day air, time-definite delivery and standard delivery. In addition, UPS provides international shipping, supply chain logistics management, warehousing and returns management services.

The company has also developed a proprietary real-time shipment tracking software solution, allowing customers to track their packages from the time of shipment to delivery. This system is one of the most advanced in the world and helps UPS maintain a high level of customer satisfaction.

Attractions

UPS is known for its fleet of "brown" vans, which are easily recognizable around the world due to their distinctive brown coloring. This colouring, known as 'UPS Brown', was chosen because the brown colour was considered professional and reliable. The company is also committed to sustainability and continually invests in environmentally friendly vehicles, including electric and alternative fuel vehicles.

Acquisition and development

UPS has made several significant acquisitions over the years that have strengthened its position in the market. Among the most important is the acquisition of Mail Boxes Etc., which was renamed The UPS Store, allowing UPS to expand its services to small businesses and individuals. Another major acquisition was the purchase of Coyote Logistics in 2015, which helped UPS strengthen its capacity in the freight forwarding and transportation industry.

New partnerships

UPS will become the primary air freight provider for the United States Postal Service (USPS). The company has won a new contract that significantly expands their existing collaboration. The majority of U.S. air shipments for the USPS will now be shipped through UPS, with the contract coming into effect after a transition period.

USPS' current contract with FedEx, which includes domestic and Puerto Rico air freight, expires at the end of September. UPS will take over this role on September 30, when their new contract with USPS will begin for a minimum of five and a half years. FedEx has announced that contract extension negotiations with the USPS have ended unsuccessfully.

The USPS has increasingly focused on cost reduction in recent years, which includes a shift from air to ground transportation. Although the USPS plans to reduce its shipping costs by $3 billion over the next two years, demand for air freight is growing globally.

Savings plans

UPS plans to close approximately 200 U.S. facilities by 2028 as part of its "Network of the Future" initiative to reduce labor costs and save $3 billion. The company is focusing on consolidating facilities and automating processes, which will reduce reliance on manual labor to sort shipments. This year, UPS will close 40 sorting lines and invest in 63 automation projectsto support volume growth. The plan includes facilities closures in Massachusetts, Texas and New York and upgrades to nearby facilities. The goal is to increase efficiency and reduce the cost of serving customers.

Analysis of United Parcel Service (UPS) results for recent years

United Parcel Service, Inc. (UPS), one of the global leaders in logistics and transportation services, has posted impressive results in recent years. In the following analysis, we look at key financial metrics such as revenue, earnings per share (EPS), and dividends, and assess how the company has performed from fiscal 2022 to fiscal 2024.

In fiscal 2022, UPS achieved record revenue of $100.338 million. In 2023, revenues fell to $90.958 million, a 9.3% decline. This trend continued in 2024, with revenues for the first two quarters totaling $43.524 million. If this trend continues, annual sales could be around $87 million, which would represent another year-over-year decline.

EPS in 2022 was significantly high, reaching $13.20 per share. This figure shows the strong profitability of the company in the previous year. However, in 2023, EPS fell to $7.80, a decline of more than 40%. This trend continues in 2024, where EPS for the first three quarters has fallen to $2.94. This indicates a continued decline in the company's profitability.

UPS has been increasing dividends in recent years, which may be a positive signal to investors about the company's stability. In 2022, the dividend was $6.18 per share, rising to $6.49 in 2023. In 2024, the company continued its dividend policy, with dividends reaching $1.63 per quarter. The total annual dividend payout per share in 2024 could be around $6.52, a slight increase from the previous year.

Why pay attention to UPS?

Is a recovery coming? UPS is significantly undervalued, according to analysts. Shares are down nearly 20% this year and are more than 45% off their early 2022 high. However, analysts believe UPS has the potential to grow.

UPS is at a tipping point, according to the data. U.S. shipment volume increased in the second quarter for the first time in nine quarters. Average daily volume increased year-over-year in 11 of UPS's top 20 export countries, which hasn't happened in 10 quarters.

Management expects a return to profit growth in the second half of the year. Costs associated with the union agreement that was negotiated last year are currently high, but UPS's cost structure will improve over the next few years.

UPS has resumed share buybacks, which is another positive signal. The company plans to repurchase approximately $500 million worth of shares by the end of 2024 and approximately $1 billion in annual share repurchases.

A business focused on long-term growth

The COVID-19 pandemic, negotiations with unions, and building its own delivery network with Amazon (UPS's largest customer) have negatively impacted UPS in recent years. However, analysts firmly believe that UPS is a business focused on long-term growth.

Despite the risk from Amazon, UPS still has a strong market position. Few companies can afford to invest billions of dollars to expand a logistics network that can compete with UPS's efficiency.

Analysts also appreciate CEO Carol Tomé's goal of doubling UPS's healthcare logistics revenue to $20 billion by 2026. They also endorse the strategy to increase shipments from small and medium-sized businesses from 29% to 35% over the same period, eventually reaching 40%. These markets offer higher profit margins, which should increase UPS's profitability.

Attractive dividend

UPS's dividend was also a key factor in why analysts recommended buying the stock. A dividend yield of over 5.1% gives UPS a favorable basis for achieving solid total returns.

Analysts expect the dividend to continue to grow in the future. The company has a stated payout target of approximately 50% of the prior year's adjusted earnings per share. Although this level will be significantly exceeded in 2024, analysts believe UPS should be able to reduce its dividend payout ratio to its target level over the next few years.

UPS Dividend Analysis

UPS recently announced a dividend of $1.63 per share, which was paid on May 30, 2024.

UPS has a long history of paying dividends, dating back to 1999. Since then, the company has continuously paid dividends on a quarterly basis and has increased them each year. This consistency makes UPS one of the so-called "dividend aristocrats" - companies that have increased their dividends every year for at least 25 years. This steady dividend growth reflects not only the company's financial stability but also its commitment to investor returns.

Dividend yields and dividend growth

Over the past three years, the average annual dividend growth rate has been 17.1%, compared to 13% per annum over the last five years. Over the longer term, over the last ten years, the growth rate has been around 9.3% per annum. These indicators show that UPS is able to increase its payout to shareholders consistently and in line with its earnings growth.

Dividend sustainability: payout ratio and profitability

A key factor in assessing dividend sustainability is Payout ratio (payout ratio), which measures the proportion of a company's profits paid out as dividends. UPS's payout ratio as of March 31, 2024 was 0.81, meaning that 81% of earnings have been paid to shareholders. This relatively high ratio may indicate limited room for further dividend increases if the company's earnings do not increase.

UPS Second Quarter 2024 Earnings Summary

Company United Parcel Service (UPS) released second-quarter 2024 results that disappointed analysts' expectations while lowering its full-year revenue forecast. The news led to a significant 12% drop in the company's stock, which represented the worst daily decline in the company's history.

For the second quarter, UPS recorded adjusted earnings per share of $1.79, below analysts' expectations of $1.99. Revenue came in at USD 21.8 billion, again below the expected USD 22.18 billion. The company reported net income of USD 1.41 billion (USD 1.65 per share) compared to USD 2.08 billion (USD 2.42 per share) in the same period last year. Operating profit fell to USD 1.94 billion from USD 2.78 billion last year.

Segment development

U.S. Domestic segment recorded a 1.9% decline in sales, primarily attributable to changes in product mix. CFO Brian Dykes said that while product mix will continue to negatively impact sales per shipment, the company expects double-digit operating profit growth in the third quarter and to achieve a 10% operating margin in the US by year-end, thanks to cost management and slowing wage inflation.

International segment experienced a 1% decline in sales, driven by a 2.9% decline in average daily volume.

Delivery Solutions segment recorded revenue growth of 2.6%, primarily driven by growth in logistics, including healthcare.

Other significant events

UPS is preparing for the sale of its Coyote Logistics division to RXO, Inc, which is expected to be completed by the end of 2024. The sale will free up funds that UPS plans to use to buy back around $500 million worth of stock. The company also announced the acquisition of Mexican express delivery company Estafeta, which it plans to close by the end of the year.

UPS also managed to win an airfreight contract with United States of America (USPS) from rival FedEx. This contract will come into effect on 1 October 2024, when the current contract with FedEx expires. UPS has described this contract as significant, indicating its potential to bring significant financial benefits to the company.

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The information in this article is for educational purposes only and is not intended as an investment recommendation. The authors present only the facts known to them and do not draw any conclusions or make any recommendations to the reader.

Investing can be risky if you approach it recklessly. Bulios does not know your financial situation and therefore does not give specific advice and tips in any way. Stock selection, strategy and portfolio construction is an individual matter, so always educate yourself and perform your own detailed analysis before buying a particular stock.