UPS(NYSE: UPS) stock was down almost 3% by 3 p.m. ET today. The move comes as higher-than-anticipated inflation data pushed out expectations for an interest rate cut.
Why high-interest rates hurt UPS
Interest rates staying relatively high for longer is bad news for a company like UPS that relies on trade to drive volume growth in its network. Indeed, UPS had a challenging 2023, with delivery volumes coming in less than expected due to sluggish growth caused by higher interest rates putting a brake on the economy.
Moreover, its profit margins come under pressure in a slow economy as consumers and businesses often switch to its less expensive delivery options to save money.
It gets worse. UPS also suffered a significant loss of delivery volume last year due to protracted labor negotiations, which caused customers to divert deliveries to other networks. It's winning them back now, but the last thing UPS needs is weaker volume growth when it's fighting to regain customers.
UPS can come back in 2024
While the market stresses the possibility of higher rates today, some perspective is needed. UPS continues to make significant progress in growing its small and medium-sized business (SMB) and healthcare revenue, and it has $1 billion in cost savings in the pipeline due to reducing its headcount by 12,000 this year.
Image source: Getty Images.
In addition, it will absorb the impact of increased costs as a consequence of the new labor contract later this year. It all points to a second-half recovery for the company, and UPS will likely end the year in much better shape than it entered it. Throw in the 4.4% dividend yield on the stock, and it's attractively priced for income-seeking investors.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
