UPS Expects Healthcare Revenue to Double by 2026. Here’s What That Means for the High-Yield Dividend Stock

Apr 1, 2024 1:41 am | News

United Parcel Service (NYSE: UPS) has plans to emerge from its current funk, but the stock has been under pressure due to negative growth and an uncertain timeline for its turnaround.

The package delivery giant gave a presentation to analysts on March 26, which included detailed insight into its three-year plan for reaching record revenue and high margins by 2026. But the stock fell over 8% in response to the news. That’s likely because growth is slower than expected, and the plan includes further losses in the short term.

However, there is a major silver lining to the company’s growth plan — its healthcare segment. UPS expects 2026 healthcare revenue to total $20 billion, or 18% of total revenue. It’s an impressive jump, considering that healthcare was a small part of the business just a few years ago.

Here’s what the healthcare segment means for the UPS investment thesis and why the high-yield dividend stock is worth buying now.

Person in lab taking notes in front of computer.

Image source: Getty Images.

Healthcare is a natural fit for UPS

Healthcare has become a massive part of the U.S. economy. In fact, it is now the third-largest sector in the S&P 500 — barely behind financials and making up 12.4% of the index.

According to UPS, the global healthcare logistics market is projected to grow from $130 billion in 2023 to $152 billion in 2026. UPS continues to invest in the complex part of that market, which has higher margins. The complex segment makes up about 54% of the total market, while precision logistics makes up $9 billion and clinical makes up $6 billion of the precision logistics market.

UPS is specifically targeting cold chain, clinical advanced therapies, labs and diagnostics, pharma, home healthcare, and medical devices — in other words, products or lab samples that are time and temperature-sensitive.

Kate Gutmann, UPS executive vice president international of healthcare and supply chain solutions, said the following on the 2024 Investor and Analyst Day presentation:

The healthcare logistics market is a major strategic move for UPS because the demand of healthcare is growing, and healthcare companies of all sizes are rapidly innovating to keep pace with the needs of an aging population and problems related to chronic disease. For example, new medical devices, especially ones suitable for home use, are on the rise.

Healthcare has many benefits compared to the company’s traditional package-delivery business to residential customers and businesses. The greatest advantage is that it is more resistant to economic cycles.

People may spend less on discretionary goods when budgets are tight. Companies will have lower order volumes and need fewer supply shipments during a widespread downturn. Healthcare is less about the economic cycle and more about where the sector is headed. UPS seems to believe the sector is headed toward convenience, which would mean greater reliance on shipping and logistics providers.

Sluggish overall growth

The company’s fast-growing healthcare segment and positive 2026 guidance sound great at first glance. But dig deeper, and there are a few issues worth addressing.

The first is that UPS has achieved $10 billion in healthcare revenue through a mix of organic and inorganic (acquisitions) growth. And it expects to hit that $20 billion number with organic and inorganic growth too. So the business is only doubling with the help of sizable investments. Still, it looks like the right long-term move if UPS is right about the evolving needs of the healthcare sector.

The bigger issue is the company’s overall trajectory. 2023 revenue was $91 billion. 2026 revenue is projected to be $108 billion to $114 billion. At the midpoint, that’s $20 billion in growth — not bad in a three-year time frame.

Half of that is coming from healthcare. Take out healthcare, and 2023 revenue is more like $81 billion. 2026 revenue would be $88 billion to $94 billion — or just a 12.4% increase in three years. That’s a paltry growth rate compared to what UPS investors had been used to during the worst of the pandemic. After all, this was a business that delivered over $100 billion in revenue in 2022.

UPS provided plenty of reasons why the rest of the business is doing poorly. But there were some big takeaways. Customers wanted to reduce dependence on China, which makes shipping and logistics more complicated. There is a surplus of overall package delivery supply right now,and UPS overestimated customer demand from the pandemic, when in reality demand has mostly flatlined over the last few years.

UPS has plenty of potential for patient investors

Ultimately, it doesn’t really matter where the company’s growth comes from, as long as it is growing. The high-margin healthcare business has room to run and is making up for disappointing results in the rest of the business. In defense of UPS, forecasting during the pandemic was extremely challenging, so it is understandable why it may have expanded too quickly. If the company meets its targets, it will be in its best shape ever by 2026, both from a sales and margin perspective.

In the meantime, the stock is inexpensive and yields 4.5%. If there was ever a time to give UPS the benefit of the doubt, it’s now, as investors are getting a sizable incentive to sit back and give the company time to recover.

Should you invest $1,000 in United Parcel Service right now?

Before you buy stock in United Parcel Service, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and United Parcel Service wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of March 25, 2024

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.

UPS Expects Healthcare Revenue to Double by 2026. Here’s What That Means for the High-Yield Dividend Stock was originally published by The Motley Fool

feed from