Should You Buy United Parcel Service (UPS) Stock While It's Below $185?

United Parcel Service's (UPS -0.20%) stock closed at an all-time high of $206.37 per share on Feb. 2, 2022. At the time, many investors were impressed by its stable growth, wide moat, and rising shipments for e-commerce platforms.

However, after setting that record high, UPS's stock price pulled back nearly 40% to about $125. It dropped as it lapped its pandemic-driven growth spurt in deliveries in 2021, struggled with higher fuel and labor costs, and lost customers as it dealt with tense union negotiations that nearly sparked a strike in 2023. Rising interest rates also chilled the economy while also making its dividend-paying shares less appealing than fixed-income investments.

Image source: UPS.

UPS' business has gradually stabilized over the past year as it overcame most of those challenges. Its stock looks cheap at 14 times forward earnings, and it's still trading about 30% below Wall Street's highest price target of $185. Should investors buy this oft-overlooked stock before it rises back to those levels?

Is UPS' slowdown finally over?

UPS is one of the world's largest courier service providers. It employs more than half a million people worldwide and serves over 200 countries and territories.

Its average daily package volume, average revenue per piece, and total revenue jumped in 2020 and 2021 as the pandemic drove more people to shop online. That top-line growth offset the near-term pressure on its margins and boosted its earnings per share (EPS).

Data source: United Parcel Service.

But in 2022 and 2023, UPS' daily package volumes declined as the pandemic tailwinds dissipated, inflation curbed consumer spending, and some customers shifted their deliveries to FedEx and other competitors to hedge against a potential strike from the Teamsters Union, which represents around 330,000 UPS workers.

UPS partly offset that pressure by raising its rates, which boosted its average revenue per piece, but that growth couldn't fully prop up its revenue or EPS. Those near-term challenges drove many investors away from UPS' stock.

For 2024, UPS expects its revenue to rise just 0.2% to $91.1 billion as its adjusted operating margin dips to 9.6%. That outlook seems dim, but several of its near-term headwinds are dissipating as it tosses more irons in the fire.

It negotiated a new worker contract with the Teamsters Union this August to avoid a strike, but it's partly offsetting those higher labor costs by laying off about 12,000 employees, investing in new logistics technologies, and automating more tasks across its network. The Fed's rate cuts over the past year also indicate that inflation is gradually cooling off.

For the full year, analysts expect its revenue to stay flat as its EPS dips 15%. But in 2025, they expect its revenue and EPS to grow 4% and 17%, respectively, as the macro environment warms up and it laps the initial costs of its new union contract.

UPS pays a high forward dividend yield of 5.2%, and that high payout should become more attractive as declining interest rates make CDs and T-bills less appealing to retail investors. It's raised its dividend for 15 consecutive years, and its payout ratio remains below 100%.

Should you buy UPS' stock while it's trading below $185?

UPS' low valuation and high yield should limit its downside potential, but its stock probably won't soar back toward $185 over the next 12 months. At $185, it would be pricier at 21 times forward earnings and its forward yield would drop to 3.5% -- which would be significantly lower than the 10-year Treasury's current yield of 4.1%.

UPS is still a solid buy at these levels if you're looking for a high-yielding alternative to bonds, CDs, or other lower-yielding dividend stocks. However, it's not the right stock for investors who are seeking out more aggressive market-beating gains.