Buy UPS on the dip because the Amazon threat is overblown, Stifel says

  • Stifel raises its rating to buy from hold for UPS shares, predicting Amazon will remain a big customer for the delivery company.
  • The firm says UPS has the "most attractive dividend" in the large-cap transportation space.
United Parcel Service (UPS) driver pushes a dolly of packages towards a delivery van on a street in New York.
Victor J. Blue | Bloomberg | Getty Images
United Parcel Service (UPS) driver pushes a dolly of packages towards a delivery van on a street in New York.

The decline in UPS shares this year is a great buying opportunity due to the company's dividend, according to one Wall Street firm.

Stifel raised its rating to buy from hold for UPS shares, predicting Amazon will remain a big customer for the delivery company.

The company's stock is down 7.8 percent this year through Tuesday due to investor worries over competition from Amazon and UPS' increased investment spending guidance for 2018.

The Wall Street Journal reported on Feb. 9 that Amazon is gearing up to launch a delivery service for businesses.

"We believe the [UPS] shares have been oversold and find it the most attractive dividend play in large cap U.S. transportation," analyst David Ross wrote in a note to clients Tuesday. "Amazon needs all the capacity it can get from its service providers, and still needs to build more capacity in-house. … Amazon is a significant customer and were they to take all their business away, it would hurt, and the stock would move lower. We just don't believe it is in Amazon's best interest to do that, nor do we believe it is consistent with Amazon's operating philosophy and stated strategy."

UPS' stock has a 3.4 percent dividend yield, according to FactSet. The company's stock closed up 3.7 percent Tuesday.

Ross lowered his price target for UPS shares to $121 from $127, representing 14 percent upside from Monday's close.

The analyst said the company will likely avoid a strike as negotiations with its unionized employees continue into the current contract's expiration on July 31. He predicts an agreement will be completed before the deadline similar to the last three deals.

"We believe the package and general freight markets remain strong, and the stock has sold off to a valuation that we believe reasonable considering the risks ahead and the increased capital investments expected over the next several years," he wrote.