Wall Street has a habit of moving between extremes, often swinging from shocking enthusiasm to despondent pessimism. That’s what appears to be on display today with this 6.5% high-yield dividend stock. It’s down more than 50% from its peak, and long-term income investors should probably do a deep dive, because the service on offer is vital to modern life.
Shares of United Parcel Service(NYSE: UPS), which normally just goes by UPS, have been a roller coaster ride. When the coronavirus pandemic hit in 2020, investors seemed to believe that social distancing would be a more long-term thing. UPS and its package delivery peers rose dramatically, as Wall Street extrapolated temporarily rising demand out way too far into the future.
When the world found a way to live with COVID and opened back up again, investors dumped UPS shares. The stock is now down more than 50% from the highs it reached in 2022. That drop wasn’t just about COVID, however, as management also set about a business revamp.
As UPS’ business cooled down, it basically added to the negativity by attempting to streamline and upgrade its business, which required costly capital investments. It also had to deal with a new labor contract, which increased employee costs. And just when everything seemed to be evening out, UPS pre-emptively decided to reduce its exposure to its largest customer, Amazon.com(NASDAQ: AMZN).
Image source: Getty Images.
The thing is, UPS appears to be making good choices. For example, making better use of technology so that the company can operate with fewer facilities and employees is not just a cost-saving move, but one that keeps the company current with the world around it. Amazon’s business is high-volume, but low-margin, and UPS is specifically attempting to focus on higher-return sectors.
As far as the long term goes, people need physical things to live. UPS has one of the most extensive and well-run package delivery services in the world. It is highly unlikely that demand for quickly and efficiently moving items from one place to another will ever go away. But investors are downbeat and the stock has cratered, which has pushed the yield up to its current lofty level of 6.5%.
There are risks here that have to be considered. For example, the dividend payout ratio is around 90%, which is quite high, and revenues were down year over year in the first quarter of 2025. However, adjusted earnings rose year over year, helped along by a 20-basis-point improvement in adjusted operating margin.
This is basically the outcome UPS is looking to achieve. Management is willing to accept lower revenues as it moves away from less attractive business. The plan is to generate higher margins as it increases its exposure to more attractive business. Assuming it can continue along this path, UPS is likely to have a solid future that includes continuing to reward dividend investors well.
Still, UPS’ business overhaul is a risk, and Wall Street is clearly saying that the risk looks high. It wouldn’t be wise for conservative dividend investors to ignore the risks, and a dividend cut is a possibility. However, UPS’ business is getting generally stronger thanks to the revamp management has undertaken, and it is highly unlikely that package delivery services will stop being needed. For more intrepid investors, this high-yield stock could be worth buying and holding for the long term.
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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. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and United Parcel Service. The Motley Fool has a disclosure policy.
