High Yield, High Risk? The Real Story on UPS
A deep dive into the valuation and dividend growth and sustainability
UPS bears no introduction.
It is a Dividend Aristocrat that is currently at risk of a dividend cut, if the business does not turn around any time soon. The stock price has declined 31% in the past 1 year.
Part of the decline can be attributed to its decision to exit the low margin business with Amazon, while there are other cyclical forces at play as well.
In this article, we will take a deep look at UPS business, its turnaround prospects, and the sustainability of its dividend. We will determine if the stock presents us with a compelling value at today’s prices and judge the risks to the business.
If you are a value investor, this is a must read for you. On the other hand, if you are a dividend growth investor, you should pay great attention to our discussion on the UPS’ dividend and its sustainability.
First, a little about me:
I’m Shailesh Kumar, and I write Astute Investor’s Calculus on Substack, where I dig deep into small-cap value stocks, constructing portfolios with the Kelly Criterion to offer long-term value investors the ultimate advantage - a trifecta of potential:
High-performing stocks strategically chosen in the top-performing asset class, small-cap value,
Precision-optimized allocations that seek to maximize your portfolio’s performance, and
A mathematically balanced approach that reduces volatility, so while stocks may fluctuate, your portfolio remains steady.
At Astute Investor’s Calculus I give you actionable ideas like this stock that is rightfully the Next Berkshire Hathaway (Part 1, Part 2, Part 3), but is currently flying under the radar. Not many analysts follow this stock, but 91% of the stock is owned by insiders and institutions leaving only 9% for the retail investors. And get this - Warren Buffett sat on the board of this company for 34 years, and owned a sizeable chunk of it through Berkshire Hathaway.
Please note: I am not a financial advisor and this is not financial advice. You can lose money investing in something you do not understand so please do your own due diligence.
Check out The Astute Investor’s Calculus!
The Past 1 Year has Not Been Kind to UPS Investors
If you invested in the UPS -1.41%↓ stock 1 year ago, your holdings have lost 31% in value. You have earned $6.55/share in dividends, which is a 7.49% yield at the current stock price. The company demonstrated its faith in its business by announcing a small dividend increase, and thus maintained it’s status as a Dividend Aristocrat.
So what has gone wrong?
Background
As the world's largest parcel delivery company, UPS manages a massive fleet of more than 500 planes and 100,000 vehicles, along with many hundreds of sorting facilities, to deliver an average of about 22 million packages per day to residences and businesses across the globe.
UPS' domestic US package operations generate around 65% of total revenue, while international package makes up 20%. Air and ocean freight forwarding and contract logistics make up the remainder.
In the past year, UPS has faced significant business pressures due to a new, expensive labor contract, declining package volumes, and a major strategic shift away from lower-margin Amazon business. These issues were compounded by a challenging macroeconomic environment and increased competition.
Labor contract with Teamsters
The most significant pressure point was the ratification of a new five-year contract with the International Brotherhood of Teamsters in August 2023.
Higher labor costs: The agreement delivered historic pay increases for both full-time and part-time workers, significantly raising UPS's operating costs. This was a major factor in the 31.5% decrease in operating profit during the first quarter of 2024.
Strike threat and volume loss: In the run-up to the agreement, the threat of a strike in the summer of 2023 caused many customers to temporarily divert their business to competitors like FedEx. This led to a significant drop in package volume during that time.
Declining package volumes
After the pandemic-era e-commerce boom subsided, UPS experienced a prolonged slump in package volume, which continued through 2024.
Reduced Amazon business: To improve the quality of its revenue, UPS strategically cut back on lower-margin deliveries for its largest customer, Amazon. As a result, Amazon's share of UPS's revenue has steadily declined.
Weaker consumer sentiment: Economic pressures, such as inflation and reduced consumer spending, have decreased overall demand for package delivery.
Market share erosion: Intense competition from non-unionized competitors like FedEx and Amazon's own expanding in-house delivery network has led to market share losses for UPS.
Restructuring and cost-cutting
In response to these pressures, UPS initiated a large-scale cost reduction plan and network restructuring.
Job cuts and facility closures: In 2024, the company announced it would cut 12,000 management jobs and close or consolidate facilities to save money.
Network adjustments: The company is implementing automation and other efficiencies under its "Efficiency Reimagined" initiative to improve productivity.
Lower-than-expected attrition: Despite offering voluntary buyouts to delivery drivers, UPS has faced a slower rate of workforce attrition than anticipated.
It has even tried to cut costs by changing the wash schedule of its UPS delivery trucks from daily to once every 2 days or less.
International and macroeconomic challenges
External economic factors further dampened UPS's performance.
Impact of tariffs: New "de minimis" tariffs on low-value goods from China led to a major drop in volume on the profitable China-to-U.S. trade route.
General uncertainty: Citing macroeconomic uncertainty, UPS withheld its financial guidance for 2025, a sign of the unpredictable market conditions. For full-year 2025, UPS initially guided for approximately $89.0 billion in revenue and 10.8% operating margin but has since withdrawn this guidance due to economic uncertainty, providing an update in their July 29, 2025 Q2 earnings report. While specific revenue and profit guidance is no longer given, the company confirms its capital expenditures will be about $3.5 billion, dividend payments are expected to be around $5.5 billion (subject to board approval), and their effective tax rate is projected to be approximately 23.5%.
Regulatory matters: The company also settled a $94 million tax issue with Italian authorities in the second quarter of 2024.
Stock Valuation
The stock today gives the company a market cap of $74 Billion. It trades at the following multiples
P/E ratio = 13.01
P/B ratio = 4.7, and,
Price/Sales = 0.8
All three metrics are towards the low end of the 5 year range.
Comparisons with the peers show that UPS valuation is generally more conservative than most of its peers.
FedEx does offer better valuation across the board and is the most direct competitor. However, keep in mind that these numbers are after a drastic drop in earnings in the past year. If and when the earnings return to their previous levels, the current valuations will appear to be downright cheap.
Earnings Trends and Future Expectations
You can see how the sales and EPS has been trending down in the past few years post-pandemic.
The declines seem to have stabilized. However, the full effect of the exit from the Amazon partnership is not yet reflected. This year’s Q4 numbers will be key to see when the bleeding stops.
Additionally, we need to consider the effects due to the following
A possible recession in the US
De-minimis tariffs and other tariffs on freight reducing shipments to the US significantly
Higher inflation will reduce ecommerce purchases
Amazon growing its share in the package delivery business
It is hard to predict the turns in the economy as no one knows where the tariffs will eventually end up, and how the rest of the world is going to respond to this.
Luckily, 65% of the UPS’ business is domestic so the tariff issues are relatively contained. There is still the risk from the high domestic inflation and possible recession.
2023 took the brunt of the declines in sales and EPS due to the post-pandemic slow down and the strikes. EPS declined significantly in 2024 as the new contract with the Teamsters came into force. In the recent quarters, sales and EPS appear to be stabilizing.
However, UPS is a quality company with high profitability, despite the expensive Teamsters contract. It also holds significant market share in the package shipping sector in the US. While there are significant economic risks going forward, the industry leading margins and the current balance sheet strength will ensure that the company is able to ride out any economic challenges and come out stronger.
Balance Sheet Strength and Dividend Sustainability
The key to riding out the current challenges and letting the business transformation take full effect, is to have a strong balance sheet. Let’s take a look at UPS’ balance sheet.
United Parcel Service (UPS) has a strong "A" credit rating from S&P Global Ratings and a strong "A2" rating from Moody's Investors Service, both with a stable outlook as of mid-2025. These ratings indicate a high likelihood of timely debt payment and a stable financial outlook, though a rating is not a recommendation to buy or hold any security.
Indeed, while the debt to equity ratio is 1.8, the company has a interest coverage ratio of 8.9. There is no likelihood of the company not able to pay on its debt, and it can pay it from its earnings.
Cash is $6.3 B, or $7.42/share. The company pays $6.56/share forward dividend per year. The existing cash on the balance sheet can currently fully cover its dividend for 1 full year, assuming there is 0 cash flow in the next year.
The business continues to produce positive cash flow. So it would appear that there is NO immediate threat to the dividends.
Please note that on the surface level, UPS today has a dividend payout ratio of 97.3%. Most analysts will tell you that this is too high and the dividends are unsustainable. A little bit of analysis and some common sense will tell you that not only are the dividends completely sustainable, the company may even be able to deliver small annual dividend growth in the next few years until the business comes back to normal.
Conclusion: UPS Stock is Quality at Fair Price with Sustainable Dividend at High Yield
UPS is a business undergoing transformation internally, as well as a number of stresses external to it. This is not a company where you do DCF analysis to determine value. Future estimates are hard as the numbers will move, and the conditions are completely unpredictable.
The best we can do is to take stock of the business as it is today, figure out its ability to overcome current challenges, and the ability to continue rewarding the shareholders.
A good investor analyzes numbers and comes to a conclusion. A great investor considers the risks and uncertainty. UPS is a fundamentally strong business and the risks of investing in it are very low. While there is tremendous uncertainty out there, this creates an opportunity for the investor who is looking to buy Quality at Fair prices.
And if you are a dividend growth investor, this is probably the best stock in the market today. It offers high yield (7.5%), fair valuation, strong fundamentals, and great upside.
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