UPS expects healthcare revenue to double by 2026.What this means for high-yield dividend stocks

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

The package delivery giant gave a presentation to analysts on March 26 in which it detailed its three-year plan to achieve record revenue and high profit margins by 2026. Dropped more than 8% respond to this news. This could be because growth is slower than expected and the plan includes further losses in the short term.

However, there is one major hope for the company’s growth plans – healthcare. UPS expects healthcare revenue to reach $20 billion in 2026, accounting for 18% of total revenue. That’s an impressive leap considering that health care accounts for only a small portion of overall revenue. business a few years ago.

Here’s what the healthcare sector means for UPS’s investment thesis and why high yield stocks Worth buying now.

People in the laboratory take notes in front of the computer.

Image source: Getty Images.

Healthcare is a natural choice for UPS

Healthcare has become an important part of the U.S. economy.In fact, it is now the third largest sector in the United States S&P 500 Index — narrowly trailing financial stocks, which make up 12.4% of the index.

According to UPS, the global healthcare logistics market is expected to grow from $130 billion in 2023 to $152 billion in 2026. UPS continues to invest in sophisticated parts of the market that offer higher profit margins. The complex segment accounts for approximately 54% of the overall market. The entire market, while precision logistics accounts for US$9 billion of the precision logistics market, and clinical accounting for US$6 billion of the precision logistics market.

UPS specializes in cold chain, clinical advanced therapeutics, laboratory and diagnostics, pharmaceuticals, home healthcare and medical devices – in other words, time and temperature sensitive products or laboratory samples.

In a 2024 Investor and Analyst Day speech, Kate Gutmann, UPS International Executive Vice President of Healthcare and Supply Chain Solutions, said:

The healthcare logistics market is a major strategic initiative for UPS as demand for healthcare continues to grow and healthcare companies of all sizes are rapidly innovating to meet the needs of an aging population and issues related to chronic disease. Devices, especially those 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 biggest of which is being more resistant to economic cycles.

When budgets are tight, people may spend less on non-essential items. During a general economic downturn, companies will take fewer orders and require fewer supplies. Healthcare has less to do with the economic cycle and more to do with where the industry is headed. UPS seems to believe the industry is moving toward convenience, which means greater reliance on transportation and logistics providers.

Overall growth is weak

At first glance, the company’s fast-growing healthcare business and aggressive 2026 guidance sound good. But dig deeper and there are some issues worth solving.

First, UPS has achieved $10 billion in revenue in the healthcare space through organic and inorganic (acquisition) growth. And it is expected to reach US$20 billion through organic and inorganic growth. So, if UPS is right about the changing needs of the healthcare industry, this looks to be the right long-term move.

The bigger question is the company’s overall trajectory. Revenue in 2023 is $91 billion. Revenue in 2026 is expected to be US$108 billion to US$114 billion. The midpoint is $20 billion of growth — pretty good over a three-year time horizon.

Half of that comes from health care. Excluding healthcare, revenue in 2023 would be approximately $81 billion. Revenue in 2026 will be $88 billion to $94 billion, or only 12.4% growth in three years. Investors with UPS are used to the worst of the pandemic; after all, this is a business with revenue exceeding $100 billion in 2022.

UPS offers many other reasons why the business is underperforming. But there are some important conclusions. Customers want to reduce their dependence on China, which makes transportation and logistics more complex. There is currently an oversupply in overall package delivery, and UPS overestimated customer demand due to the pandemic, when in fact demand has been essentially flat over the past few years.

For patient investors, UPS has a lot of potential

Ultimately, it doesn’t matter where a company’s growth comes from, as long as it’s growing. The high-margin healthcare business has room to grow and is making up for disappointing results in other businesses. Defending UPS during a pandemic is extremely challenging, so it’s understandable why it’s expanding too quickly. If the company hits its target, by 2026 it will be in the best shape it’s ever been, both from a sales and margin perspective.

At the same time, the stock is cheap and yields 4.5%. If there was ever a time to give UPS the benefit of the doubt, it’s now, as investors have considerable incentive to sit back and give the company time to recover.

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Daniel Fulber There are no positions in the above stocks. The Motley Fool recommends United Parcel Service. Motley Fool has disclosure policy.

UPS expects healthcare revenue to double by 2026.What this means for high-yield dividend stocks Originally published by The Motley Fool

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