Is United Parcel Service Stock a Buy Now?

Share prices of United Parcel Service (NYSE: UPS) have dropped about 5% over the past decade. That makes it sound as if nothing has been going on at the company. However, that's not the case at all. In fact, the stock doubled in price between 2020 and 2022, only to lose all those gains. Here's why now could be a good time to buy UPS for more aggressive investors.

United Parcel Service takes off

One of the first things investors need to grapple with is the massive price spike that began in 2020. The truth behind the numbers is that investor emotions are what drove UPS' price rally. The coronavirus pandemic had begun, consumers were stuck at home, and online shopping exploded. Wall Street extrapolated that temporary demand well into the future, bidding up the shares of package delivery companies like UPS.

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It is fairly common for investors to get overly excited about events that are likely to be temporary. As the world learned to live with COVID-19, online shopping slowed down, and so did the demand for UPS services. And, as so often happens with emotions on Wall Street, the mood around UPS' business turned deeply negative.

To be fair, the company didn't do much to help its cause. Management decided to undertake a major business overhaul at about the time that investors were starting to sour on the business. The changes are meant to make UPS a more nimble and more profitable company. It is a reasonable goal, but this is a process that will likely take a while to play out.

UPS: Bad news and good news

UPS' overhaul has included selling off entire business lines, which reduces revenue. It has involved capital investments in new technology, which improves efficiency. Improved efficiency has enabled the closure of older facilities and the reduction of staff, which reduces costs over the long term but incurs upfront expenses. The company has also chosen to focus on more profitable customers while reducing exposure to less profitable customers, which hinders sales but improves margins.

There are numerous moving parts, and reading the company's financial statements is difficult right now. But the near-term story is pretty simple: UPS' top line is falling even as its costs are rising. This should be a temporary situation, but, as noted above, investors often extrapolate trends too far into the future.

Finding some positive news requires a little digging, but it is there. One notable green shoot is that the revenue UPS generates per package in the United States has risen for two consecutive quarters. Customer and product mix were both significant contributors to that success, suggesting that the structural moves management is making are working as planned. Meanwhile, UPS has been able to push through price increases, which hints that demand remains strong.

These are early positives, and significant work remains to be done as the company executes its turnaround efforts. Investors shouldn't overlook the risks here. For example, the dividend payout ratio is currently over 100%. The board of directors has supported the dividend so far, but it wouldn't be surprising to see a dividend cut since the business is being overhauled. So conservative dividend investors attracted by UPS' lofty 6.8% yield should probably tread with caution.

Whom is UPS right for?

Given what management is attempting to achieve, UPS is best viewed as a turnaround stock. On that front, the green shoots starting to show up in the company's package delivery business are clear positives. Still, investors shouldn't take a short-term view here. UPS' business isn't going to turn on a dime. The changes being made are designed to position the company for a brighter long-term future. So if you buy UPS, make sure you take a long-term view as well.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends United Parcel Service. The Motley Fool has a disclosure policy.