UPS’ third-quarter earnings and guidance demonstrated the underlying potential for the company.
Management’s cost-cutting and margin focus are central to the UPS story.
Dividend sustainability and trade headwinds remain key uncertainties.
UPS (NYSE: UPS) rose by 15.4% in October, according to data provided by S&P Global Market Intelligence. It’s a return to form for a stock that’s still down on the year (25% at the time of writing), driven by a relatively strong set of third-quarter results and fourth-quarter guidance that positions the company well for 2026.
The underlying growth potential at UPS is positive, and management is implementing tangible operational improvements. However, the company is facing challenges in some end markets, and its capital allocation policy warrants scrutiny. That was the best summary of the company before the results, and nothing changed after them either.
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However, what did change is a greater sense of confidence around management’s execution, and bullish investors received encouragement. For example, management affirmed it was on track to deliver $3.5 billion in expenses in 2025 (with $2.2 billion achieved thus far).
The expense cut is necessary as part of UPS’ underlying strategy, which is to repurpose its deliveries and network toward higher-margin deliveries. That’s why it’s focusing on key, and higher-margin, deliveries for small and medium-sized businesses (SMBs) and healthcare. It’s also why it’s “gliding” down its delivery volume for Amazon by 50% from the end of 2024 to the middle of 2026 — many business-to-consumer deliveries for Amazon are low- or even negative-margin for UPS.
The expense cuts are beneficial, as was the news that U.S. domestic revenue per piece improved by 9.8% in the quarter, helping offset volume declines, which CEO Carol Tome attributed to “the planned glide down of Amazon volume and a targeted reduction in lower-yielding e-commerce volume.” Moreover, UPS won market share in the SMB market, albeit as SMB daily volume declined 2.2% year over year.
Image source: Getty Images.
In addition, management served notice that its dividend was sustainable, with CFO Brian Dykes stating that fourth-quarter free cash flow (FCF) would “look similar” to the $2 billion generated in the third quarter. If so, UPS will finish the year generating $4.7 billion in FCF. It won’t cover its dividend payment of $5.5 billion, but Dyke, discussing FCF in relation to the dividend, said it would “be above that in the very near future.”
The company continues to face headwinds, not least from tariffs impacting its SMB customers and its most profitable international trade routes, and it’s far away from its aim of a dividend approximating to 50% of its earnings.
That said, the company is on a path to improving margins by shifting to higher-margin deliveries, and that was evident in an earnings report that exceeded market expectations.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and United Parcel Service. The Motley Fool has a disclosure policy.
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