UPS Trades at Premium Valuation: Should Investors Buy the Stock?

United Parcel Service UPS is currently considered relatively overvalued, trading at a forward 12-month price to earnings (P/E) of 13.15X. This figure surpasses the Zacks Transportation—Air Freight and Cargo industry average of 12.72X. It is also higher than rival FedEx Corporation FDX.

UPS's P/S F12M vs. Industry & FDX

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The question that naturally arises is whether it is worth overpaying for the transportation heavyweight? Let us delve deeper and analyze UPS’s fundamentals and overall business environment.

UPS’s Dividend Strength Enhances Appeal

UPS prioritizes returning capital to shareholders, as evidenced by its record of either maintaining or increasing its dividend each year since going public in 1999. Currently, UPS offers a dividend yield of 6.6%, which is higher than the 4.8% of the composite stocks in the industry. The transportation company’s above-industry dividend yield is a huge positive for income-seeking investors. This highlights the company’s confidence in its cash flow and prospects.

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’s 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.

UPS’s Buyback Program Lifts Confidence

In addition to cheering investors with regular dividend payments, UPS is active on the buyback front. In 2023, UPS’s board approved a share repurchase authorization for $5 billion. In 2024, the company bought shares worth $500 million. In the first quarter of 2025, UPS repurchased shares worth $1 billion, completing the target for 2025.

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. Free cash flow in the first quarter of 2025 was $1.5 billion.

Assessing UPS’s High Valuation

The positive developments have likely led to UPS’s premium valuations, as investors have high expectations for the company’s prospects and profitability. Consequently, they are willing to pay a premium for the stock, anticipating that it will outperform its peers and the broader market in the coming months.

However, there are several uncertainties regarding the stock. 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.

The slowdown in online sales in the United States, apart from soft global manufacturing activity, adds to the woes. Labor expenses, courtesy of the deal with the Teamsters union, are high, limiting bottom-line growth. Amid revenue weakness, rising capital expenses as witnessed in UPS’s case are unwelcome and may dent profit margins. United Parcel Service’s high debt levels represent another concern.

UPS expects the second-quarter adjusted operating margin to be 9.3%. Second-quarter revenues are anticipated to be $21 billion. The effective tax rate is likely to be 23-23.5%. The average daily volume for the U.S. Domestic segment is expected to decline 9% in the June quarter. Revenues in the International Package segment are expected to decline 2% year over year in the June-end quarter. Results are scheduled to be out on July 29.

The uncertainties surrounding UPS are likely reflected in its price performance; UPS shares have performed disappointingly year to date, underperforming its industry and fellow industry player, GXO Logistics GXO due to low shipment volumes.  UPS, FedEx and the industry declined 21.2%, 21.1% and 18.6%, respectively, while GXO Logistics gained 10% year to date.

YTD Price Comparison

UPS shares have plummeted 26.8% in a year, steeper than the industry’s 24% fall. FedEx and GXO Logistics have slid 24.4% and 3.9%, respectively, in a year.

Southward Earnings Estimates for UPS Stock

Over the past 60 days, the Zacks Consensus Estimate for UPS’s second- and third-quarter 2025 earnings, as well as its 2025 and 2026 earnings, has moved south.

How to Play UPS Stock Now?

Based on the write-up, we can safely conclude that while the company’s long-term outlook is strong and some investors may be willing to accept the premium. However, caution is warranted, given the near-term concerns associated with the stock. Despite signs of easing trade tensions, we do not expect the trade-related uncertainty to dissipate until a concrete long-term trade deal is in place. As a result, due to the tariff-related uncertainty, UPS is likely to continue suffering from a demand slowdown at least in the short term.

Instead of rushing to invest in UPS, which currently carries a Zacks Rank #3 (Hold), it is prudent to wait for a more advantageous entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

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This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research