Why I Just Bought This Beaten-Down 5%-Yielding Dividend Stock
Should investors be fearful or greedy right now? Warren Buffett famously said to be the opposite of others.
Buffett has amassed a whopping $277 billion cash stockpile for Berkshire Hathaway and has been selling more stocks than he has been buying. He seems more fearful than greedy these days.
I’m going to be the opposite. I opted to put some of my cash to work in recent days. In particular, I loaded up on shares of freight and logistics giant United Parcel Service (NYSE: UPS). Here are three reasons why I just bought this beaten-down 5.1%-yielding dividend stock.
1. Poised for a rebound
To describe UPS as beaten down probably doesn’t go quite far enough. The stock has declined nearly 20% this year and plunged over 45% below the peak set in early 2022. But I think UPS is poised for a rebound.
For one thing, UPS is at an inflection point. The company’s U.S. volume grew in Q2 for the first time in nine quarters. Average daily volume increased year over year in 11 of UPS’ top 20 export countries, something that hasn’t happened in 10 quarters.
Management expects a return to solid earnings growth in the second half of the year. The higher costs associated with the company’s union deal negotiated last year are heavily front-loaded, which means UPS’ cost structure will improve over the next few years.
UPS has resumed stock buybacks, another positive sign. The company plans to repurchase around $500 million of its shares in the remainder of 2024 and buy back roughly $1 billion of shares annually going forward.
2. A business built for the long run
The COVID-19 pandemic, union negotiations, and Amazon (UPS’ largest customer) building out its own delivery operations have hurt UPS in recent years. However, I firmly believe that this is a business built for the long run.
UPS still has a pretty strong moat despite the risk from Amazon. Few companies can afford to invest the billions of dollars required to scale up a shipping network that can run as efficiently as UPS can.
I like CEO Carol Tomé’s goal to double UPS’ healthcare logistics revenue to $20 billion by 2026. I also applaud her strategy to increase small- and medium-sized business volume from 29% to 35% during the same period and eventually get to 40%. These markets offer higher profit margins that should boost UPS’ bottom line.
3. An attractive dividend
UPS’ dividend was also a key factor in my decision to buy the stock. The dividend yield of over 5.1% gives UPS a nice head start in delivering solid total returns.
I expect the dividend to grow in the future; UPS has increased its dividend for 15 consecutive years. The company has a targeted payout of around 50% of the previous year’s adjusted earnings per share. Although it will be well above that level in 2024, I think UPS should be able to reduce its dividend payout ratio to its target over the next couple of years.
UPS’ top capital allocation priority is to reinvest in the business, but having a stable and growing dividend is a close second. Importantly, stock buybacks rank as the company’s fourth-highest capital allocation priority. With UPS beginning to repurchase shares again, it seems clear that management doesn’t expect to have any problems continuing to pay the dividend at least at current levels.
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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. Keith Speights has positions in Amazon, Berkshire Hathaway, and United Parcel Service. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
Why I Just Bought This Beaten-Down 5%-Yielding Dividend Stock was originally published by The Motley Fool
