Buy the Dip on This Logistics Leader Before Its Next Leg of Compounding Growth Kicks In

UPS (NYSE: UPS) has experienced quite a dip in recent years. Shares of the global logistics giant are currently down more than 50% from their peak a few years ago. As a result, its dividend yield has skyrocketed to 6.5%. It has battled a barrage of headwinds, including high labor costs, tariffs, weaker market conditions, and a strategic decision to reduce its reliance on its top customer, Amazon.

However, while shares of UPS are down, the logistics leader appears to be right on the cusp of turning things around. That makes now a great time to buy the dip before a reacceleration begins.

Slowly changing course

UPS has realized that not all volumes are worth the cost. As a result, the company made the strategic decision earlier this year to cut the volumes it ships for Amazon by over 50% by the end of next year. While Amazon contributes around 20% to 25% of its volume, it only supplied about 11% of its revenue last year. Most of the volumes it ships for the top e-commerce company have low profit margins.

As part of the transformational shift away from Amazon, UPS is undergoing a major restructuring. It aims to cut $3.5 billion in costs by the end of this year by reducing its headcount and closing locations.

The company is also investing to grow its more profitable business lines, including healthcare logistics. It closed its $1.6 billion acquisition of Andlauer Healthcare Group in November to enhance its complex healthcare logistics operations.

The green shoots of a recovery

The slow shift away from Amazon will continue to negatively impact the company's results. Its revenue declined by 3.7% in the third quarter while its adjusted earnings per share fell 1.1%. However, the company is starting to see some underlying progress. Its U.S. revenue per piece grew by 9.8% during the quarter, while its domestic operating margin rose slightly.

Meanwhile, some of the company's other headwinds appear to be slowly fading. Rival FedEx reported better-than-expected results for its fiscal second quarter, despite ongoing trade uncertainty and weak shipping markets. The company also increased its guidance for the fiscal year. It now expects sales to grow 5% to 6% (up from 4% to 6%) and adjusted earnings between $17.80 and $19 per share (increasing the low-end from $17.20 per share). UPS also provided investors with a better-than-expected outlook for the fourth quarter.

Additionally, UPS' free cash flow is improving. It generated $2 billion during the third quarter alone, after producing only $742 million during the first half of the year. Free cash flow should continue heading higher as the company executes its cost-reduction strategy (it achieved $2.2 billion of its $3.5 billion target by the end of the third quarter). That's putting the company's high-yielding dividend on a more sustainable foundation.

Delivering high total return potential

UPS appears to be turning the corner. Its strategy to reduce its reliance on Amazon is improving its profitability, while some market headwinds seem to be abating. If these trends continue, UPS could deliver robust total returns to investors in the future as its stock price rebounds, and it continues to pay its lucrative dividend.

Matt DiLallo has positions in Amazon, FedEx, and United Parcel Service. The Motley Fool has positions in and recommends Amazon and United Parcel Service. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.