Why I Just Bought This Beaten-Up 5% Dividend Stock

Should investors be fearful or greedy right now? Warren Buffett has said he’s the opposite of everyone else.

Buffett has amassed a massive cash pile of $277 billion to Berkshire Hathaway and he sold more shares than he bought. He seems more fearful than greedy these days.

I’m going to do the opposite. I’ve chosen to put some of my money to work in recent days. In particular, I’ve invested in shares of the freight and logistics giant United Parcel Service (NYSE: UPS)Here are three reasons why I just bought this beaten-down 5.1% dividend stock.

1. Ready for a rebound

Describing UPS as struggling probably isn’t enough. The stock has fallen nearly 20% this year and is down more than 45% from its peak in early 2022. But I think UPS is poised to rebound.

For one thing, UPS is at an inflection point. The company’s U.S. sales volume increased in the second quarter for the first time in nine quarters. Average daily volume increased year over year in 11 of UPS’s top 20 export countries, a feat not seen in 10 quarters.

Management expects a return to solid earnings growth in the second half of the year. Higher costs associated with the union agreement negotiated last year are heavily concentrated at the beginning of the year, meaning UPS’s cost structure will improve over the next few years.

UPS has taken over share buybacksAnother positive sign. The company plans to repurchase about $500 million of its stock by the end of 2024 and repurchase about $1 billion of stock per year going forward.

2. A business built for the long term

The COVID-19 pandemic, union negotiations and Amazon (UPS’s largest customer) has set up its own delivery operations, which has hurt UPS in recent years. However, I firmly believe that this is a business built for the long term.

UPS still has a fairly strong position ditch Despite the risks associated with Amazon, few companies can afford to invest the billions of dollars needed to build a shipping network as efficient as UPS.

I like CEO Carol Tomé’s goal of doubling UPS’s healthcare logistics revenue to $20 billion by 2026. I also applaud her strategy to increase small- and midsize-business business volume from 29% to 35% over the same period, and ultimately reach 40%. These markets offer higher profit margins that should boost UPS’s bottom line.

3. An attractive dividend

UPS’s dividend was also a key factor in my decision to buy the stock. The dividend yield of over 5.1% gives UPS a good head start to generate solid total returns.

I expect the dividend to increase in the future; UPS has increased its dividend for 15 consecutive years. The company aims to pay out about 50% of the prior year’s adjusted earnings per share. While it will be well above that level in 2024, I believe UPS should be able to reduce its dividend payout ratio to its target over the next two years.

The story continues

UPS’s top priority in capital allocation is to reinvest in the business, but a stable and growing dividend comes in second.