UPS Stock: Can It Still Deliver for Dividend Investors?

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When a stock’s price is falling, its yield is sky-high, and there’s plenty of doubt, it looks like a classic value trap. Does it ever make sense for dividend growth investors to walk into that trap? Sometimes, what’s under the hood tells a very different story.

In Episode 51, Greg revisits UPS ($UPS), a company we last covered years ago but is now back on our radar for entirely new reasons. Rising wages, Amazon contract changes, and global trade tariffs have cut the stock price in half since 2022, sending its dividend yield toward 8%. At first glance, it looks like the market is pricing it for a dividend cut.

But step behind the headlines, and the story gets more compelling: UPS continues to post solid margins, generates strong cash flow, and has the scale and efficiency to remain a leader in global logistics. Even if a dividend cut occurs, investors may still come out ahead with sustainable yields and renewed dividend growth potential. Greg breaks down the scenarios, risks, and catalysts that make UPS a compelling story to consider.

Topics Covered:

•  [00:03:32] Why UPS looks like a high-yield “problem child” but may still be a dividend growth play
• [00:06:20] UPS’s history: growth in revenue, profits, and dividends since 1999
• [00:09:58] The “trifecta” of headwinds—union wage hikes, Amazon contract cuts, and tariffs
• [00:12:36] Comparing UPS vs. FedEx ($FDX), Amazon ($AMZN), USPS, and DHL in market share and profitability
• [00:19:57] How AI could improve delivery efficiency
• [00:21:12] Business metrics, profitability, debt profile, and why UPS’s financing signals investor confidence
• [00:25:27] The dividend dilemma: can UPS sustain its payout, or is a cut coming?
• [00:27:44] Three scenarios: steady dividend, improved valuation, or a cut that resets growth
• [00:31:47] Long-term catalysts: tariffs, Amazon shifts, and global trade recovery
• [00:33:37] What research firms (Morningstar, Value Line) are projecting for UPS
• [00:34:56] Final take: UPS as a value play that still pays you to wait

Disclaimer: This discussion is for educational purposes only and not investment advice.

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Transcript

[00:00:11] Greg Denewiler

 This is Greg Denewiler, and you are listening to another episode of the Dividend Mailbox. A monthly podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks. When they grow over time, a funny thing happens: you create wealth.

Welcome to episode 51 of the dividend mailbox. 51 times we've talked about dividends, and lo and behold, here we are going at it again. This time, we're going to look at a company that we have talked about in the past, but it's been a few years. The story, as it continues to unfold, has become an interesting take for us now. From a dividend growth story, it's been working great. The total return is a little different story. But with that can be great opportunity, and that's what we're going to talk about here in a minute. 

But before we do, I just want to quickly mention that in the show notes, there's going to be a link that you can subscribe to our observations on the market newsletter. It's one page, it comes out once a month. It's a slightly different approach than what these podcasts are. If you're interested, feel free to subscribe to that. 

And also, the last couple of episodes, we made an offer that we would do a portfolio overview where we give you, on a scale of one to five, how we think your portfolio looks compared to our dividend growth strategy. It's a three page overview, just a simple look. But if you send us your positions and either the number of shares or weights that you own, we will give you some ideas that may help you as you continue on the dividend growth story. So if you would like a portfolio overview, just email us at dcm.team@growmydollar.com.

So with that, we will get into episode 51.

Today's episode is going to be all about looking behind the numbers. At first, it's going to sound like we're hypocrites, and that will be obvious here in a minute. But stay with us because I think by the end, you're going to see how really knowing this story and what you're trying to achieve makes all the difference in the world.

If you're a first-time listener or you've been with us for a while, we've made a big deal about staying away from high-yield companies and our, what we call “dividend sweet spot” is around two and a half, three point half percent. Well, today we're going to focus on a company that we did look at, but it's been several years ago, all the way back to 2022. It's UPS. And if you are following it at all, the yield is over 7%. In fact, it's close to eight. So that is really the definition of a high-yield company, which we've said over and over, it's better to stay away from them. So it sounds like we're really getting off track here, but we think it's still a dividend growth story. It's a value play, and it's a turnaround all rolled up into one package. To make it even better, it could even be a dividend cut, which gets it back on track, but still makes it a good investment, which we're going to get into in much more detail later. 

So first of all, we do own it, and it is one of the positions in the model portfolio, and ironically enough, there's two reasons why the dividend now is almost 8%. The first one is that it's been a great dividend grower since we've owned it, but the second reason is it's down from an all-time high of $233 in 2022, all the way down to now, where it's trading in the mid-eighties. When you have a stock that just declines day after day, month after month, you start to get a feeling of: Does this ship have a rudder? Have I missed something? Or is this going to be one of the ones that we were wrong on? Because sooner or later, you're going to have one that just doesn't work. 

So that prompted me to reach out to a friend of mine who's a broker, and he does a lot of technical analysis. The whole thing behind technical analysis is that it's supposed to give you the momentum or what potentially is going to happen in a stock, short term. Supply and demand, looking at all that stuff. If you know anything about us, we really don't lean on that much. But when things aren't going well, you start to look for answers anywhere and everywhere you can find them. The answer I got back on technically what it looked like in the short term; it could go as low as $64, and it probably should not be purchased unless it trades back up above $90, which would show a little bit of a trend reversal.

That caught my attention because $64, in my mind, I thought, you have to be kidding me. There's a real business here and this thing's not going to disappear. You're not hardly putting any value on this as a going concern. That led me to really start to look at, “Okay, where are we at here?” It's becoming a real value play, but you ask yourself, “is it the infamous value trap?”

So one of the first things I did was I looked up, “Okay, what's the history of UPS?” We first purchased it in 2012, and we have a cost basis in it on the original acquisition of $76. UPS actually went public in November of 99. It went public at $50. Right away, you could sit there and start to think: the stock's at $85 right now as we do this recording, and if it goes down to $64, it's barely above where it went public 26 years ago. 

Where was the business in 99? They had revenue of $27 billion. Now they have revenue of $90 billion. In 1999, they had net income of $183 million. Today, they have $5.7 billion trailing 12 months of net income. Well, that seems to me like a business that has grown fairly substantially. 

Like I said, it's been one of our better dividend growers. In June of 2012, the quarterly dividend was 57 cents, and now it's up to $1.64. So in 13 years, it's grown its dividend at 8.5% a year, which is above our hurdle rate. And this is the beauty of an income stream, especially as it grows. I mentioned we paid $76 for it. We have received in those 13 years $53 of dividends. That puts no weight on either the interest we earned or how we reinvested that money. We did not reinvest in the stock, and in this case, it was good because we would've bought some of it over $200 as the dividends got reinvested. That leaves us with net in our original purchase of $23 a share. If you use this number, you've gone from $23 to $85, which is where it currently is, but of course, that's more than a little misleading. But the $53.60 based on the $76 we paid is 4.1% a year. Plus we've had a little bit of capital appreciation. Fortunately, it has not been dead money. Now has it returned what the market has done? No, you know, nowhere close. However, going all the way back to 1999 when this thing went public, all the way up to 2022, to going into 2023, it basically kept up with the SP 500 and Federal Express. If you look at recently in the last 10 years. UPS had kept up all the way into 2023 with not only the market, but also with Federal Express. 

So the last two years has been really ugly for it, but if you're a student of the market or have been an investor for very long, it's not where you've been. It's where you're going. Even if you paid significantly more for this because it seemed cheap at the time, the market couldn't care less what you paid for something. The only thing that matters is what the dollar is worth today? Where's the dollar going tomorrow? And the perception right now, I think, there are three reasons why UPS looks like the Titanic at the moment.

First of all, in 2023, they agreed to a pretty substantial wage increase with the Teamsters. All workers are going to receive a 7.50 an hour increase in wages by the end of 2028, which is fairly significant. 

And then we get to January of 2025, UPS elected to end the contract with Amazon. They're revising it to cutting it basically in half by the second half of 2026. The Amazon portion of UPS's business was about 11 to 12%. It's significant, but it's not a dramatic hit. 

And then finally, it's almost a strike three here in the near term, as you've had wage increases, you've had a little bit of a cut in business, and then you throw tariffs on top of it. The international piece—tariffs have definitely had an impact. They've cut the trade between China and the US, and that is a significant part of UPS's business. So you kind of have a trifecta at the moment going against it. 

So to deal with this, UPS announced that they're going to try to cut 20,000 workers in 2025. They're going to close some facilities. I've already mentioned they're going to reduce shipments to Amazon, which we're going to get into, which actually may help. They are offering a lot of buyouts to full-time drivers. They're expecting that it could generate up to $3.5 billion in cost savings. But you throw all those things together, the market doesn't like uncertainty.

Investors are saying, we're going to take this behind the barn and move on to something else. It's a boring business to begin with. They're brown trucks driving around with people wearing brown clothes, and they do simple stuff. Well, if you haven't gotten this message from the dividend mailbox, simple stuff can make a lot of money.

If you look at $65 a share at the end of ‘99, it had a $71 billion market cap. They have since bought back almost 300 million shares. With the current 847 million shares out, their market cap is $72 billion. It is, for all intents and purposes, the same value as it was in November of ‘99. If you look at earnings right now, they earn around $6.50. That is a PE ratio of about twelve. In my mind as a value investor, I start to look at that: Is there opportunity here somewhere?

Now to really understand the company, you have to look at who their major competitors are. Looking at the size of UPS, there's only, I'm going to call it three and a half.

We're going to start with the post office. Do I really need to say a whole lot about the post office? Delivery dates are not dependable. You just don't have efficiencies there. So personally, I don't think the post office is a major competitor, but they are a competitor because if you're not in a hurry to get a package somewhere, the post office is a choice.

FedEx, they're the big one. They're the ones that compete overnight. They compete on the ground, they compete around the world. They're really their only true competitor, but UPS continues to hold their own. 

The third one is Amazon. Amazon is a competitor on a different scale, more on the smaller package front, and that's where UPS really wants out because they just don't make much money or any money if they're delivering a small package. That's most of what the business they're giving up. So, it could actually help margins a little bit. 

Now you may be wondering what is a half competitor? Well, DHL is mainly over in Europe and overseas. They are definitely competitors over there, but over here in the US, they have a much smaller presence. 

So that's basically the market. I think this paints the picture better than anything. If you look at the total market share by packages delivered, the largest is the US Post Office, it's basically 30%. Amazon is around 25% or slightly more. UPS is in the very low 20 percentile area, and FedEx is 14 to 15%. But if you look at market share by revenue—you really need to pay attention to this—you go from UPS being a little more than 20% of market share by packages delivered, to when you look at revenue, UPS is around 35%. FedEx comes in at around slightly above 30%. The US Post office is a little over 15% and Amazon is 12%. So UPS is the big player. It's all about profitability. 

Here's the deal. Most people who use FedEx or UPS, they want the package there at a certain time. That's part of what they pay for. The difference between FedEx and UPS, UPS is stronger on the ground. They got more of those brown trucks running around. They're more efficient in their distribution system, and they do lean heavier in the higher value packages that get delivered. When you look at FedEx, they really excel in the air and speed, and global express. If you want something overnight. What do you think of? You think of FedEx? Both of these companies really do all of the above. They really just have different niches where they're strong. 

If you look at revenue, FedEx does $87 billion of revenue. UPS does $91 billion. So seems like they're pretty close. If you look at operating income, and this is through the end of 2024, which they had already started paying their employees more money, operating income is $5.2 billion for FedEx and UPS. They have operating income of $8.4 billion. Operating cash flow: FedEx has $7 billion, UPS through 2024 has $10 billion. So UPS is a more profitable business, and if you look at assets, FedEx has $87 billion of assets on the balance sheet. UPS has $70 billion of assets, so they make more money with fewer assets.

I find this kind of interesting because it does get into, okay, you know, how are these businesses competing and how are they different? FedEx has $31 billion of aircraft. UPS has $23 billion, so again, you know, FedEx is heavier towards overnight. Trucks and trailers: FedEx has $11 billion, and UPS has $11.9, so they are a little heavier towards the truck. You know, they deliver the last mile. That's one of their big deals. 

This brings up Amazon. They basically are backing away from about half of Amazon's business. And if you really think about it, and I think it makes sense, a lot of Amazon's business, they're delivering these small little packages. I actually had a friend, he had him deliver some ink cartridges for his fountain pen, and it was a small little box, like a matchbook size box, and they do free delivery. They cannot be making money on that transaction. Well, UPS has zero interest in delivering that package. Amazon is delivering a lot of their own stuff now. However, they still do use UPS. They use FedEx, they use the post office, but one of the things that Amazon does not do, and they are experimenting in this category, you cannot do returns through Amazon's distribution network. And another thing which is important, you cannot call Amazon and say, “Hey, I've got this box I want you to deliver to South Africa. When can you pick it up?” They only deliver their own stuff. They're pretty much all franchised. All of those trucks running around are run and operated by franchisees. 

FedEx owns their planes. The ground portion of FedEx does have franchisees. UPS is the only one that controls end-to-end to end the entire process of delivering. Personally, I think it's a competitive advantage. 

And another thing that UPS is famous for, they're known for, they don't make left turns. They have very strict routes. And I think this is huge because I think AI is going to be a big plus for both FedEx and UPS. It probably only helps with how to most efficiently run the route. They can potentially change it as they're going through the day, looking at traffic. And if you've got weather coming, you know what they may or may not be able to do to handle that. Can Amazon use it? Sure, they're going to use it to a degree, but when they have their distribution spread out over thousands of franchisees, it gets pretty hard to really control that. With FedEx and UPS, I think AI is only a positive for these companies. That actually could be a reason to own this thing long-term because it just makes the company more efficient. What would be the drawback? Well, it appears that the biggest one is unions usually resist change. It could slow down how fast it gets adopted. I would speculate that AI is coming on fast, unions, or really anybody is going to have a hard time stepping in front of that train, or I should say brown truck.

So now, as we go into the business and why we actually think at the very minimum we are going to continue to hold it, revenue, 20 years ago in 2004 was $36 billion. At the end of 2024, they finished the year at a little under $91 billion. Earnings have gone from $2.93 up to $6.75. They are down a little bit. I will tell you earnings estimates for this year are around $6.75, basically where they're running at a run rate right now. 

So for a stock that's totally fallen out of bed, if you look at going back to 12/2022, their gross profit margin was 20.7%. It’s fluctuated between a low of 16.5% up to a high of about 21%. At the end of December, 2024, it was 20.8%, and the quarter ending in June, it was 18%, so it had backed off a little bit. Trade with China and trade with Canada has backed off a lot. So the fact that they're still at 18% margins is, from my standpoint, really on some level, a little incredible. Can it go lower? That's part of what the market's a little afraid of. 

If you look at profit margins, they've averaged since 12/2022, 7.5%. They've run in the sixes. They had a low in March of 2024 of 5%. Right now, they're running at 6%. Down a little bit, but not a lot. 

The business has remained pretty solid. Return on invested capital, right now, it's running in around 13.5%, which we looked for 10% minimum. They have been higher in the past. 10 years ago, it was 20%. But the asset base has grown. That does put a little bit of pressure on maintaining that kind of profitability with all their asset levels. 

Well, current debt, first glance, you would say, well, it seems a little high to me. Their debt-to-equity ratio is one and a half times. They do have more debt than Federal Express compared to their equity. From my standpoint, this is almost good news because the debt's rated A, and they have debt laddered all the way out pretty evenly all the way out to 2065. They only have $2.6 billion maturing in the next four years, going up through 2030. The biggest year is about a billion, and it goes between 500 million to a billion. 

The debt trades at a level of, and this is an indication that I try to use, are there some problems that the investor community they're starting to get nervous? Five-year UPS debt trades at a yield of 3.8%. If you buy a five-year treasury right now, you get 3.56%. That is a pretty tight spread, meaning two things: their debt costs are low and they can raise money cheaply. It also means that investors have zero fear and that this company potentially is going to run into financial trouble. That's probably the biggest message right now because a lot of times you'll start to see those debt spreads widen if investors start to get nervous.And their EBITDA is about between 8, 9, 10 times what their interest costs are. They have no real issue with any kind of real financial stress. 

However, one of the fears in the marketplace right now is, is the dividend going to get cut? 

So the dividend 20 years ago was $1.12. 10 years ago, it was $2.68. Right now, it's up to $6.56. The dividend is basically what earnings are. You know you've had a great dividend run, but it's a 7.8% dividend yield. Is that dividend going to hold? We're going to start building that story. 

If they cut the dividend in half, which incidentally would save them about $2.7 billion, that would be a dividend of $3.26, which is still higher than our original dividend that we received in 2012. If they cut it to $3.26, the dividend based on the current price of $85 is still almost a 4% yield. That really is in our sweet spot, slightly above it. If they're going to save $2.7 billion of dividends that they don't have to pay out, that leaves them plenty of room to manage their business, pay the dividend, and really to get back on a dividend growth track. 

Here's the thing, I'm not totally sure if they're going to cut it, because when you have five-year debt costs of 3.8% and you take 3.8% of $2.7 billion, that's $102 million a year of interest costs. Companies do this all the time. Now you have to be careful because you don't want to dig a hole that's hard to get out of, but they can finance this dividend for a couple of years if they have a high degree of confidence that they're going to return to positive cash flow, even after paying dividends and still wanting to buy some stock back. Especially with it down here. I don't think it's a simple answer that, oh, the dividend's going to get cut. It really is a choice for them. They don't have to do it based on cash flow. They have plenty of room. 

So that's going to lead to, we have our infamous 10 year simple model. We're looking at three scenarios that could play out with UPS.

Scenario number one is that there's no cut. The dividend stays where it is. Maybe it's a 1% grower for the next several years. 

Scenario two is where the market starts to think, Hey, they're going to be able to work their way out of this. The yield declines simply because the stock starts going up again. 

Scenario three is where they cut the dividend in half, and this is where it gets interesting.

So number one, the dividend is $6.56. They raise it by 1% a year, which I have to tell you that's probably a realistic assumption. In 10 years, it goes to $7.17. If you have the stock continuing to trade at a 7% yield, you make 102% on your money over the next 10 years. Tou say, well, that's not 7% dividend growth.

I'm going to say you're starting at a yield that's three times higher than where our quote sweet spot is to try to get 7% dividend growth. We've said this in the past. If you get a higher dividend and you maintain it, you don't need as much dividend growth because you've got great compounding power. We don't need 7% dividend growth. We only need them to just keep it. In three years, you got 20% of your capital back. That's a significant number, and it changes the equation. 

Here's scenario number two. You get 1% dividend growth, it's at $7.17 cents. But because by that time they have proven they've been able to maintain the dividend, and let's just say the marketplace is a little more confident, and it trades at a 4% yield on $7.17, you just have a total return, not counting, compounding of 193%. You 2x your money. 

So now we're going to get to the dividend cut, and this is why, personally, I believe that we're going to stay out of the hypocrisy category. Let's just assume they cut it in half and they cut it down to $3.26. Based on the current price, you still have a yield of just under 4%, but at that point you can quite likely get 5% dividend growth fairly easily going forward. And they've shown that they want to be shareholder-friendly. With 5% dividend growth in 10 years, you've then grown it from $3.26 up to $5.06. If the stock continues to trade at a 4% yield in 10 years, and investors are not valuing the business any differently, they're valuing it on the same yield, you got a hundred percent return on your money.

If it declines below that, the numbers just get extremely attractive, fast. If the market actually does, because they've got 5% dividend growth, and the market decides that, you know what, this thing should actually only yield 3% because I've got a nice, predictable income stream here, the stock has gone from $85 to $168. You had a 4% dividend that grew, and you got a stock that, for all intents and purposes, doubled, and then you've got compounding on top of that. So for those of you who think the dividend mailbox has gone rogue here, I'm telling you, I think we win no matter what happens to this thing. Now, I am assuming that they're not going to cut the dividend more than 50%. I've been surprised before, but we will see. 

Here's where I think we start to get into some catalysts. The tariff situation is not going to be indefinite. Now, I know that the headlines and all the political noise that's running around, I mean, you have no idea how long it's going to last. In the worst case, we're going to have a new administration in three, three and a half years. There's probably, at the very minimum, going to be a change in tariffs. Number two, China is not going to continue to hold back. And yeah, it's expensive right now, but the reality is China, Canada, and every other country in the world, they want to trade. The track record of our president—when he gets a sense that it's going to start to impact the economy or it's going to hurt his approval rating in any significant way—so far the track record has been, he backs off. I think that's one catalyst. 

As far as working out the thing with Amazon, that'll probably get smoothed out in the next year or so, when the marketplace sees that it may actually save UPS a little bit of money. Yeah, it brings down revenue a little bit, but you don't want more revenue if you don't make any money on it. That just puts less strain on their equipment. It's a win-win. But when the market doesn't know how it's going to play out, the first thing they do is sell it and ask questions later.

Just to give you a little perspective, Morningstar actually rates it four stars. They have a one to five-star rating, with five stars being their highest. If it gets down to $70, they would rate it five stars. They have a fair value on it, they think it's worth $118. 

If you look at Value Line, they had it rated two for safety and four for timeliness. They have a scale of one to five. One is their highest rating. For dividend growth, they've got it projected right now at 1% a year, and at the moment they project they'll keep their dividend. Interestingly enough, Value Line has a 2028 to 2030 projection, they've got this stock between $135 and $185. Well, if this thing goes back to $135 and it maintains their dividend, it's uh, sort of a version of a home run.

So remember, yeah, there's execution risk, but one of the things you have here is a company that has shown that they can execute. They maintain their margins. They went through a big jump in 2020, where e-commerce just skyrocketed, and a lot of companies had problems right-sizing that business after it started to slow down. But UPS, I mean, from my mind, the execution risk is not that great. They have proven themselves over an extended period of time that they can manage the business. There's always risk when you invest, but just step back and think what business is going to be potentially more predictable than one that is basically tied to GDP growth. Now, we'll tell you, you have to be a little careful with this going forward near term. Once this whole, Amazon thing gets sorted out, you probably have a relatively good level of confidence that this is a GDP growth company. 

It is considered to be a wide moat business and personally can't really see how that's going to change. UPS does business in 220 countries. That is called a wide moat. 

So to sum up the UPS story, we really think this is just a timing problem, how long it takes them to execute. They're working on cutting costs. The whole business foundation is there. We think it's intact. We think AI is only going to make the model better.

UPS is just a great long-term story. Even if the dividend gets cut, that potentially is going to be a positive. It may not even get cut that much if they do cut it, because if they cut it in half, clearly you've got plenty of cash flow to continue to grow the business, pay the dividend. There's always the chance to be wrong, but that's part of the game of investing and this is how you get some really good gains if you just step back and say, well, why would they not be shareholder-friendly now when they have been, pretty much, since they went public?

Our goal is to own something that's going to pay us and pay us well over time, so we think it's well worth wading through UPS. This story just seems like a great value play that's going to pay you at the same time.

If you enjoyed today's podcast, please leave us a review and subscribe. If you would like more information regarding dividend growth or our investment strategy, please visit growmydollar.com. There you'll find previous episodes and also our monthly newsletter. If you have any questions or anything to add to today's episode, please email ethan@growmydollar.com.

Past performance does not guarantee future results. Every investor should consider whether an investment strategy is right for them and all the risk involved. Stocks, including dividend stocks, are volatile and can lose money. Denewiler Capital Management may or may not have positions in the publicly traded companies mentioned herein.