Down 50% With a 5.9% Dividend Yield, Here's Why This Dirt Cheap Value Stock Is Worth Buying in February

At the time of this writing, the stock of United Parcel Service (NYSE: UPS) is down 17.5% since reporting fourth-quarter and full-year 2024 results on Jan. 30.

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The dividend stock is now hovering around its lowest level in more than four years and is down over 50% from its all-time high.

Here's why the sell-off in UPS is a buying opportunity despite serious challenges with the underlying business.

Image source: Getty Images.

Poor results and weak near-term guidance

One look at the following chart and it's easy to see why the stock has sold off.

UPS data by YCharts; TTM = trailing 12 months.

The company enjoyed a period of sizable sales growth and margin expansion during the pandemic. However, it has failed to build upon that growth over the last few years, and margins have declined closer to pre-pandemic levels.

UPS' forecasts for 2025 show few reasons to be optimistic. Management is guiding for $89 billion in revenue and 10.8% operating margins. The guidance essentially indicates a return to 2023 results, a year in which UPS had $90.96 billion in revenue and adjusted operating margins of 10.9%.

Leaning into what's working

Given years of overpromising and underdelivering, it admittedly has become increasingly challenging to be optimistic about a UPS turnaround. But the good news is that the company seems to have a better handle on where it wants to go and isn't afraid to communicate the anticipated pain that investors must endure in the meantime.

What stood out in the latest earnings call was an anticipated 50% reduction in delivery volumes from Amazon, UPS' largest customer, by the second half of 2026. The shipping company is making the move to boost margins by focusing on its most profitable segments.

In October 2019, UPS launched its Digital Access Program (DAP) to grow its e-commerce business by offering small and medium-size businesses (SMBs) valuable tools and services.

DAP hit the ground running, becoming a $1.3 billion business in 2021. The company has since built upon that momentum, growing DAP revenue by 17% in 2024 to $3.3 billion.

Another standout in 2024 was growth in healthcare. Despite an overall volume decline in business-to-business (B2B) customers, UPS experienced growth in healthcare B2B, as well as healthcare with SMBs. On Jan. 8, it completed its acquisition of Frigo-Trans, a European healthcare logistics company specializing in cold-chain shipments. In December, UPS opened two healthcare cross-dock facilities for rapid transfers of temperature-sensitive products -- one in Germany and the other in Italy.

Healthcare is an instrumental part of the company's long-term growth plan. In its March 2024 investor presentation, management said it expected healthcare revenue to double by 2026 as it leaned into time- and temperature-sensitive shipments. In fact, the increase in healthcare was expected to be so large that it comprised roughly half of overall revenue growth projected for between 2023 and 2026.

Despite a wave of guidance cuts and a complete reset in medium-term expectations, healthcare has been a rare bright spot. The company is still expecting exponential growth in this category, even as the rest of the business struggles. CEO Carol Tomé said the following on the fourth-quarter earnings call:

Healthcare is such an opportunity for us. The healthcare market growth slowed down a bit in 2024. The market grew 2.5%. We grew 5%. So our healthcare revenue for the year, about $10.5 billion. We've got plans to take that to $20 billion by 2026.

Management has invested heavily in healthcare because it believes it is a growing market that can deliver high-margin results, allowing it to be less dependent on low-margin business-to-consumer deliveries.

UPS' dividend is safe

UPS has the potential to turn its business around. But years of disappointment and weak 2025 guidance give investors little to smile about. Besides being a turnaround candidate, the allure of the stock is its massive 5.9% dividend yield.

It didn't used to have an ultra-high yield. But some mammoth dividend raises in recent years and a languishing stock price have pushed the yield up.

Investors worried that the company will cut its payout can rest easy knowing management is committed to returning capital to investors. In its fourth-quarter earnings release, it said it expects to make $5.5 billion in 2025 dividend payments, $1 billion in stock buybacks, and $3.5 billion in capital expenditures (capex).

For context, UPS spent $5.9 billion on dividends and buybacks in 2024 and $3.91 billion on capex. Of that, it spent $5.4 billion on dividends and paid down $3.8 billion in debt.

So while it is pulling back a little on capex, it is restoring investor confidence in the dividend by implying a slight raise in 2025.

The company has long said it is targeting a payout ratio of 50%, meaning half of earnings are going toward the dividend. It continues to be well above that range, but mainly because of its pension expense. Tomé said the following on the earnings call:

From a dividend payout perspective, we're targeting 50% of earnings, and we're higher than that. It's important to note, however, that it's distorted because of the below-the-line noncash pension expense. And if you ignore the noncash pension expense, the payout ratio isn't as high as it appears at its pace. So plenty of liquidity to pay the dividend.

In sum, management believes its dividend is affordable and it can continue to make minor raises even while it turns the business around.

A high-yield value stock for patient investors

UPS has made a series of strategic blunders in recent years. Those mistakes have translated to a lower stock price. Its weak guidance gives investors few reasons to hold the stock through this period other than the hope that it can emerge as a stronger company, along with the passive income potential from the dividend.

As appealing as the dividend is, the stock is only worth buying if you think the company is charting a path toward higher earnings growth through its efficiency improvements and focus on SMBs and healthcare. Because ultimately, a dividend is only as strong as the company paying it. And if UPS fails to grow earnings, it won't be able to raise or even sustain its existing dividend expense.

Given all the uncertainty, investors are getting the chance to buy it at a dirt cheap valuation (a price-to-earnings ratio of just 16.4). Investors who believe the worst is over should consider buying the stock now. But if you want to give the turnaround more time to play out, it's also reasonable to consider keeping UPS on a watch list.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.