UPS (UPS 1.19%) was once considered a stable blue chip stock for income investors. It's one of the world's largest shipping couriers, it's been a member of the S&P 500 for 23 years, and it's raised its dividend annually for 16 consecutive years.

But over the past 12 months, UPS' stock dropped more than 20% as the S&P 500 rose nearly 20%. Let's see why it underperformed the market, and if it's still worth buying today.

Image source: UPS.

Why did UPS underperform the market?

UPS' average daily package volume and average revenue per piece grew in tandem in 2020 and 2021 as the pandemic drove people to buy more products online. Its profits also surged as its higher fees offset its rising operating expenses.

Data source: UPS.

But in 2022 and 2023, UPS' package volumes dropped as the pandemic-driven tailwinds dissipated, inflation throttled consumer spending, and the threat of a potential strike from the Teamsters Union -- which represents roughly 333,000 UPS workers -- drove some of its customers to shift their deliveries to FedEx and other courier services. UPS tried to offset those slower shipments with price hikes, but its operating margins were still squeezed by higher labor and fuel costs.

In 2024, UPS' package volumes and total revenue rose again. That recovery was driven by the stabilizing macro environment and a new contract with the Teamsters Union to avert a strike. However, those higher labor and pension costs -- along with its divestment of Coyote Logistics, regulatory fines in the U.S. and Italy, impairment charges, and investments in its digital upgrades -- still reduced its earnings per share (EPS) by 13% on a generally accepted accounting principles (GAAP) basis.

What's next for UPS?

UPS plans to automate more of its services, invest in new logistics technologies, reduce its mix of lower-margin customers, increase its mix of higher-margin enterprise customers and small to medium-sized businesses (SMBs), and further prune its workforce. It already laid off about 12,000 employees after it secured its new Teamsters contract last year, and it aims to save $1 billion in 2025 through its new "Efficiency Reimagined" plan to further cut costs and streamline its business.

For 2025, it expects its revenue to dip 2% to $89 billion, with an 8.5% decline in its average daily package volume offsetting a 6% increase in its average revenue per piece. However, $1.5 billion of that revenue decline can be attributed to its divestment of Coyote. Excluding Coyote, it expects a milder decline of about 0.6%.

That mixed outlook indicates that UPS hasn't quite reached its cyclical trough yet, and it expects that slowdown to continue as it intentionally reduces its orders from its largest customer -- Amazon -- by more than 50% through 2026. That reduction will throttle UPS' near-term revenue growth, but it should boost its long-term profits, since Amazon's orders generate lower-margin revenue than its smaller customers.

However, UPS expects its adjusted operating margin to expand to 10.8% in 2025 as its cost-cutting measures kick in. It also plans to buy back $1 billion in shares, and analysts expect its GAAP EPS to grow 16% for the full year.

At $117, UPS' stock looks cheap at 15 times that estimate. It also pays an attractive forward dividend yield of 5.6% -- which is significantly higher than the 10-year Treasury's 4.3% yield.

Is it the right time to buy UPS?

UPS is overcoming many of its previous challenges, and its top-line growth should stabilize once it fully laps its sale of Coyote and its reduction of Amazon's orders. Until that happens, it should keep focusing on stabilizing its operating margins, growing its earnings, and plowing its free cash flow into its ongoing dividends and buybacks. Its low valuation and high dividend yield should also limit its downside potential and make it an attractive investment in this frothy market.

UPS' stock won't blast off anytime soon, but it looks like a safe place to park your cash and earn some extra income. So for now, I think it's a worthy buy for value-oriented income investors.