United Parcel Service UPS management recently announced a 0.6% hike in its quarterly dividend payout. This transportation heavyweight, in its latest shareholder-friendly move, raised its quarterly dividend by a cent to $1.64 per share (annualized $6.56 per share).

The hiked dividend will be paid out on March 6, 2025 to shareholders of record as of Feb. 18, 2025.  UPS offers a current dividend yield of 5.7% compared with the air freight and cargo industry’s 4.2%. The transportation company’s above-industry dividend yield is a huge positive for income-seeking investors. This highlights confidence in its cash flow and prospects.

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UPS has hiked its dividend five times in the past five years. This is encouraging, as stocks with a strong year-over-year dividend growth history often offer a greater scope of capital appreciation than simple dividend-paying stocks. UPS’ strong dividend track implies that it is less susceptible to large swings in the market and it acts as a hedge against economic or political uncertainty as well as stock market volatility. 

Given this background, the question that naturally arises is whether investors should buy UPS stock at current levels. Let us delve deeper to answer the question.

UPS’ Buyback Program Lifts Confidence

In addition to cheering investors with regular dividend payments, UPS is active on the buyback front. In 2023, UPS’ board approved a share repurchase authorization for $5 billion. In 2024, UPS bought shares worth $500 million. For full-year 2025, UPS expects to repurchase shares worth $1 billion.

Strong cash flow generation is serving UPS well, allowing the company to remain committed to returning value to shareholders. UPS demonstrates financial strength with $6.3 billion in free cash flow in 2024. The company's annualized cash flow growth rate has been 2.8% over the past 3-5 years, which is in line with the industry average.

UPS Stock is Inexpensive Relative to Sector

United Parcel Service’s valuation is attractive at the moment. In terms of the forward 12-month price/sales ratio, UPS is trading at 1.09X, lower than the sector’s 1.87X. The reading is also below its median over the last five years. The company has a Value Score of B.

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UPS’ EPS Estimate Revisions Unfavorable

On Oct. 30, UPS announced its decision to reduce business with its largest customer, Amazon AMZN. To this end, UPS’ management announced that it had reached an agreement, in principle, with its largest customer to lower AMZN’s volume with UPS by more than 50% by June 2026.

The Amazon news was mainly responsible for the shipping giant issuing a lackluster revenue guidance for 2025. For the current year, on a consolidated basis, UPS expects revenues to be $89 billion, way below the Zacks Consensus Estimate of $94.6 billion at the time of announcement.

Following the dismal guidance, analysts are seemingly turning pessimistic on the stock and downwardly revising earnings estimates over the past 30 days.

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Other Headwinds Facing UPS Stock

The Amazon news apart, UPS has been suffering from revenue weakness as geopolitical uncertainty and higher inflation continue to hurt consumer sentiment and growth expectations. The weak demand scenario has led to a decline in the volume of packages shipped.

Labor costs, courtesy of the deal with the Teamsters union, are high, limiting bottom-line growth. Per UPS management, due to this deal, wage and benefit costs will increase at a 3.3% compound annual growth rate for the next five years.

Amid revenue weakness, rising capital expenses, as witnessed in UPS’ case, may dent profit margins. UPS’ high debt levels represent a further cause for concern.

UPS’ Disappointing Stock Price Performance

Due to the headwinds mentioned in the writeup, UPS shares have not performed well, lagging its industry and rival FedEx FDX in a year.

1-Year Stock Price Comparison

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Steer Clear of UPS

The negative sentiment surrounding the stock is quite evident, with earnings per share estimates for UPS moving south due to the reasons mentioned above. Investors have ample reason to be wary of investing in UPS stock currently.

As there is significant doubt about whether the challenges facing UPS will ease this year, investor sentiment surrounding this shipping giant is unlikely to get a boost any time soon. The combination of its weak current performance and an uncertain future casts a shadow over UPS’ prospects despite its shareholder-friendly attitude. So, the stock, currently carrying a Zacks Rank #4 (Sell), appears a risky prospect for investors.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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