Should You Buy This 5.1%-Yielding Dividend Stock at a 4-Year Low?

United Parcel Service (NYSE: UPS) plummeted over 12% on Tuesday in response to worse-than-expected second-quarter 2024 earnings and weak guidance. Even after a late-week recovery, the shipping giant's stock is treading water around a four-year low. The sell-off, combined with sizable dividend raises in recent years, has pushed UPS' yield above 5%, the highest in company history.

Here's what's driving the sell-off, and why now could be a good time to scoop up shares of the dividend stock .

Image source: Getty Images.

Failing to deliver

The following chart sums up the state of UPS' business.

UPS Revenue (TTM) data by YCharts.

Only a few years ago, UPS was growing sales at a breakneck rate while maintaining or growing its margins. Now, both metrics are headed in the wrong direction.

UPS' second-quarter results were just poor, not terrible. But they were flat-out horrific within the context of where the company has been and where it needs to go.

UPS hosted an investor presentation in March. It was chock-full of useful information, including a reset of expectations and new forecasts for delivery volumes and customer demand. UPS discussed purposeful spending, including investments in its healthcare segment for shipping time- and temperature-sensitive products. UPS expects healthcare revenue to double by 2026 .

To its credit, UPS admitted it overspent and the business had become inefficient. But it was confident it could make the necessary improvements to get operating margins to 13% by 2026. UPS also set a revenue target of $108 billion to $114 billion. To get there, it would spend the first year growing volumes and adjusted operating profit, and then the following two years on volume and margins.

With a new plan in place and crystal-clear expectations, the stage was set for UPS to deliver. About a month after UPS' investor presentation, it released its first-quarter 2024 results. They were fine, but the most important aspect was that UPS maintained its full-year guidance. This quarter, UPS revised its full-year guidance down -- most notably, lowering operating margin expectations. Here's a look at the full-year guidance from the recent quarter compared to the 2024 guidance given in past quarters.

Data source: UPS.

As mentioned, UPS said it would focus more on package delivery volumes than margins this year. Sure enough, the company grew U.S. volumes for the first time since fourth-quarter 2021, but only by 0.7%. International volume growth was down 2.9% -- hence the strain on overall revenue.

If UPS maintained or raised revenue at the expense of margins, that would be one thing. But it's guiding for roughly the same revenue and is spending less. Yet its margins are expected to be around a whole percentage point lower than initially thought.

A margin percentage difference is a big deal for a company like UPS. Simple math tells us that UPS is now expecting $8.74 billion in operating income, compared to $9.6 million at the midpoint of its prior guidance.

During the earnings call, UPS said it was confident it would finish the year with a 10% margin, which could help bridge the gap to reach its 2026 target. But still, the market's reaction to send the stock down over 12% in response to the results and management commentary indicates UPS has no slack for missing its targets.

UPS is behind schedule on its three-year turnaround, but expects to right the ship by year end. If it does, that could help stabilize the stock. In the meantime, UPS is under even more pressure to prove to investors that it knows where its business is headed.

UPS resumes buybacks, maintains dividend

Despite all the challenges, UPS now expects to repurchase $500 million in stock in 2024, and then around $1 billion per year going forward. At first glance, the buyback looks irresponsible considering the state UPS' operations are in. But UPS now plans to spend $500 million less on capital expenditures than originally planned, and it has more cash available thanks to an asset sale. In late June, UPS announced it was selling its Coyote Logistics business for $1.025 billion.

Repurchasing shares at a four-year low could be a great way to drive shareholder value in the long run. But with a market cap of $110 billion, even $1 billion in buybacks reduces the outstanding share count by less than 1%. The buybacks may not be sizable, but the dividend is.

UPS' dividend has long been a core part of the investment thesis. Due to outsized gains during the early part of the pandemic, UPS raised its dividend by 49% in early 2022. Over the last four years, the dividend is up 61% and the stock price is down 19% -- which is why the yield is at record levels.

UPS is targeting a payout ratio of 50%, meaning half of earnings per share would go toward dividends. The payout ratio is above 100% now, so we shouldn't expect dividend raises anytime soon. However, management has repeatedly said that maintaining the current dividend is a top priority. And given how large it is, and UPS' efforts to use some cash to repurchase stock, it's probably best to simply focus on getting its house in order before even considering a dividend raise.

A buy for the bold

With a high yield and a price-to-earnings ratio of 21, investors are getting the chance to buy UPS for a great price and collect passive income in the process. But it's worth understanding the pressure UPS is under and what Wall Street expects.

If UPS shows any sign of missing its new 2024 guidance or falling further behind on its 2026 goals, it wouldn't be surprising if the stock continued to tumble. It could still languish even if it is tracking toward its three-year plan.

The best way to approach UPS is to consider where it could be five years from now, not where it is today. The long-term growth potential of e-commerce is still intact, and UPS has a commanding position in the space. Many of its issues seem solvable if it aligns its business with moderate demand growth. The dividend is a worthwhile incentive to hold the stock through this period. However, some investors may prefer a wait-and-see approach to ensure its 2026 goals are still achievable.

UPS has been one of the most disappointing companies in the industrial sector over the last few years. But investing is more about where a company is headed than where it is today. Investors who believe in UPS' turnaround could do well to buy the stock, with the knowledge that the worst of the downturn may still be coming.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy .