UPS Is DIRT CHEAP With a 7.5% Yield — Bargain or Dividend Trap?
Disclaimer: This page contains some affiliate links that might just lead you to the promised land of awesomeness (or at least some cool products). I personally use all of the products promoted, and recommend them because they are companies I have found to be helpful and trustworthy. I may receive commissions for purchases made through links in this post.
Let’s be honest, one of the first things all of us dividend investors look at is the yield. We try to fight it, we try to deny it, but the higher the yield, the more tempting the stock becomes.
With that said, a dividend yield that looks too good to be true tends to come with more of a story. And right now, the situation with UPS—a company that needs no introduction—is definitely a story worth telling.
Source: Snapstock
Over the past year, the share price has dropped about 30%, and if you zoom out over the past five years, the stock is still down roughly 35%.
That’s pretty poor performance, no doubt, but that decline has pushed the dividend yield up to 7.65%—which is more than double the company’s five-year average of just 3.3%.
Source: Snapstock
Typically, when a stock’s dividend yield moves up above the historical average, that makes it look like a bargain (since dividend yields tend to stay within a certain historical range).
In the case of UPS, that makes it look pretty attractively valued. But the real question is whether this is a golden opportunity for income-seeking investors, or a warning sign that something is wrong with the company.
Now UPS is one of those companies we all interact with—probably some more regularly than others. The company delivers millions of packages every day, which undoubtedly makes it an essential part of global commerce.
What makes a company like UPS tough to compete with is the combination of its global scale, distribution network, and unmistakable brand. You can’t just wake up one day and build out the fully-functioning network of planes, trucks, warehouses, delivery routes, and technology that UPS has spent over 100 years putting together (the company was founded in 1907).
Source: Snapstock
The problem is that after hitting record highs in 2021 and 2022—when sales, earnings per share, and free cash flow were at all-time highs—UPS has taken an undeniable step backward.
As we can see from the charts above, earnings and free cash flow in particular have been moving in the wrong direction, which is a big red flag for dividend investors. Lower earnings and free cash flow mean less dividend coverage, which can call into question the safety of the dividend.
Fortunately, the company is still generating plenty of revenue, but it hasn’t been able to turn that into consistent bottom-line growth. One of the biggest reasons is higher labor costs.
In 2023, UPS signed a new labor contract with the Teamsters union, which secured major pay increases and benefits for roughly 340,000 employees. While that was a big win for workers, it’s also a heavier cost burden for the company moving forward.
Source: Seeking Alpha
Another detriment to the financials is declining package volumes. Domestic demand has been trending down over the last few years, and UPS isn’t the only company feeling the impact.
Other shipping and logistics companies, like Old Dominion Freight Line (ODFL), have also reported weaker shipping volumes. Subsequently, their share price has also taken a pretty big hit.
This suggests that the slowdown isn’t entirely UPS’s fault. Some of the blame can be passed on to the broader economy.
Source: Snapstock
In addition to declining earnings and free cash flow, there are some other cracks starting to show.
Debt, for example, doesn’t look terrible at first glance. Net debt to free cash flow is sitting at about 3.9x on a trailing twelve-month basis, which is manageable. The issue here, though, is the interest coverage ratio.
Back in 2021, UPS could cover its interest more than 25 times over. Today, that figure has fallen to just 7.5—slightly below where I’d like to see it (my threshold is about 8.0).
Source: Snapstock
The dividend tells a similar story. The current 7.65% yield is undoubtedly hard to ignore, but the payout ratios are looking a bit too questionable for my liking.
In 2021, UPS was paying out just 26% of earnings and 33% of free cash flow as dividends. While the company was generating peak profits during this time, both of these numbers still left plenty of wiggle room for the dividend.
Fast forward to today, and the earnings payout ratio has shot up to 97%, while the free cash flow payout ratio has exploded to more than 158%. That’s certainly not sustainable.
Source: Snapstock
Part of the reason these payout ratios shot up so much has to do with the declining earnings and free cash flow, but it didn’t help that UPS raised its dividend by nearly 50% back in 2022.
Once again, these were peak profit years, so they were likely riding high off of that. But now the fundamentals haven’t kept up, and that’s exactly why I’m so concerned that the company may have no other option than to cut the dividend.
All in all, I don’t own any shares of UPS, and at this point, I’m not interested in buying it. The financials have been moving in the wrong direction, and the dividend coverage (or lack thereof) is a major red flag for me.
If I wanted exposure to shipping and logistics, I’d rather look at companies like Old Dominion Freight Line (ODFL) or even FedEx (FDX).
Both companies have much lower starting yields, but the fundamentals are stronger and the long-term dividend growth potential looks better. To me, those are better options than chasing yield with UPS right now.
Having said all of that, I’d love to hear from you. Do you own any shares of UPS, or are you thinking about buying at these levels? Write to me here and let me know.
And if you want to learn about a few stocks that, like UPS, I think could be next to cut their dividends, check out this video here.
Dividend Investing Democratized
Join thousands of savvy investors in the pursuit of early retirement. Get Retire With Ryne delivered straight to your inbox every week as you build your perpetually growing, cash-flowing dividend stock portfolio.
Blossom is a unique social platform created by investors, for investors. Unlike the usual social media platforms, Blossom is dedicated exclusively to discussions on finance and investing.
I've been actively posting on Blossom for a few years now and I absolutely love the community on there. With over 400,000 DIY investors, Blossom is buzzing with all sorts of different investment ideas. The coolest part is that you can see everyone's full portfolios (including mine), which you can automatically link within the app!
Picture Twitter/X, but with an added portfolio tracking feature and less trolling – that's Blossom for you. Personally, I find it much more enjoyable than my experience on Twitter/X, and I think you will too.
Download Blossom today, and follow me (@ryne) to see my entire portfolio and stay updated on all my real-time investment moves.
IN MY PORTFOLIO 📈
Start tracking your portfolio with Snowball Analytics today—free for 14 days! Plus, use code "rynewilliams" at checkout to get 10% off your subscription.
ICYMI 🎥
How To Find The PERFECT Stocks To Buy | Ep. 34
In this episode of The Deep End, we break down the full process of finding the perfect stocks to buy—from stumbling across great companies in everyday life, to analyzing their financials, and knowing when to pull the trigger.
CAREFULLY CURATED 🔍
📺 A Lost Art - The legendary PPC Ian says dividend investing has officially become "a lost art." And honestly, with everyone chasing hyper-growth stocks or piling into high-yield covered call ETFs, he’s right.
🎧 The Compounder's Element - On this episode of the Art of Quality podcast, Laurence Endersen—author of The Compounder’s Element—talks about migrating from cheap to quality stocks, cognitive strip mining, his investment checklist, and more.
📚 Betting On Casinos - With online gambling on the rise, some investors worry about what it means for REITs like VICI Properties, whose biggest tenants are physical casinos. But this study shows online gaming has actually boosted casinos—not hurt them.
SINCE YOU ASKED 💬
"If you could start again, would you go for growth to build up a dividend cow, or go with mostly dividends again?"
- Joey Stidham | YouTube
If I could go back in time and start investing from scratch, I would still choose the dividend investing path without a doubt. This approach just fits me like a glove.
And in my opinion, dividend investing is the gift that keeps on giving. It's one of those things that just gets better with time, and after five years of consistent investing, I'm even more gung-ho about dividend investing today than I was as a brand-new investor.
Have a question? Ask me here to see it featured in an upcoming newsletter.
