UPS: A Strategic Investment Opportunity in 2024
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Why You Should Consider UPS for Your Investment Portfolio
You've probably heard the investing adage, "Don't try to catch a falling knife." The premise is that buying a stock that's in a clear downtrend can backfire because you can't know whether it will decline even further.
The old saying is often good advice, but not always. Sometimes, stocks that have fallen significantly and haven't rebounded are great picks. United Parcel Service (NYSE: UPS) appears to be a compelling example, as this highly regarded high-yield dividend stock is down significantly since early 2022. However, this dismal performance now presents what could be a once-in-a-decade buying opportunity.
Behind the Decline of UPS
Why has UPS stock experienced such a significant decline? The short answer is that the company's revenue and earnings have dropped, prompting investors to bail out en masse. Multiple factors contributed to UPS' declining financial fortunes.
During the peak of the COVID-19 pandemic, shipping volumes surged as consumers took to online shopping. UPS benefited greatly during this period; however, this artificial boost didn't last, leading to a return to more typical levels.
The macroeconomic environment following the pandemic worked against UPS as well. Inflation spiked, causing the company's costs to increase while consumers limited their spending. Moreover, the Federal Reserve raised interest rates to combat inflation, leading to higher borrowing costs that affected operations.
Additionally, UPS faced challenges from its largest customer, Amazon. As Amazon expanded its internal distribution network, UPS saw its revenue from the e-commerce giant decline from 13.3% in 2020 to 11.8% by 2023.
Further complicating matters, the threat of a union strike also negatively impacted UPS' operations as some customers sought alternative shipping solutions. Although the strike was ultimately averted, the costs associated with UPS’ five-year contract with the International Brotherhood of Teamsters put additional strain on the company's profitability.
Positive Indicators for UPS' Future
Despite the challenges, there are several indicators suggesting that UPS' future may be brighter than its recent past. During a recent earnings call, UPS CEO Carol Tomé announced that U.S. shipping volumes began to grow in May, marking the first increase in nine quarters. Additionally, average daily volume rose year-over-year in 11 of the top 20 export countries during the second quarter.
Tomé forecasted that UPS would return to positive earnings growth in the second half of 2024. Although this growth may not be robust initially, it is expected to gain momentum as the company moves past the associated costs of its recent union contract.
Moreover, UPS' focus on healthcare logistics and catering to small to medium-sized businesses is likely to contribute to stronger earnings moving forward. The company’s comprehensive logistics network is beneficial for these segments.
Assessing the Investment Potential
UPS has recently announced a recommencement of its stock buyback program, aiming to repurchase approximately $500 million of its shares in 2024, with plans to sustain buybacks of $1 billion annually. Such proactive measures indicate confidence in the company’s future performance and share value stabilization.
Despite a decline in trailing 12-month revenue, UPS' stock price remains lower than its 10-year average price-to-earnings multiple. This suggests a compelling opportunity for investors who believe the stock is at, or near, an inflection point. Additionally, UPS offers a forward dividend yield that exceeds 5.1%, further appealing to income-focused investors.
Is It Time to Invest in UPS?
Before deciding to invest in United Parcel Service, it is imperative to conduct thorough research and analysis of your investment strategy. Balancing potential rewards with the associated risks is crucial.
While other stocks may be outlined as top picks, UPS presents a unique opportunity based on its current valuation, historical performance, and operational cost management. As the company navigates its recovery phase, it is poised for potential growth that could benefit shareholders in the long term.
Frequently Asked Questions
1. What factors led to the decline in UPS's stock price?
UPS's stock price declined primarily due to reduced revenue and earnings, rising inflation, higher interest rates, and increased competition from Amazon.
2. Is UPS expected to recover in the near future?
Yes, analysts are optimistic about UPS's recovery, especially as U.S. shipping volumes have shown promising signs of growth.
3. Why is UPS considered a good investment now?
UPS is viewed as a good investment due to its potential for earnings growth, a high dividend yield, and the recent announcement of a stock buyback program.
4. What are UPS's future plans for growth?
UPS plans to focus on healthcare logistics and enhancing services for small to medium-sized businesses to drive future growth.
5. How can I assess UPS's financial health before investing?
Investors should evaluate UPS’s financial statements, current market trends, and management's outlook during earnings calls to make an informed decision.
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