Lee Samaha, The Motley Fool
6 min read
The latest earnings from UPS (NYSE: UPS) were well received by the market, easing concerns that a combination of higher interest rates and rising fuel costs might put pressure on its delivery volumes and margins in the quarter. In the end, UPS delivered a solid quarter, and management sounded confident about the company’s future margin expansion and the sustainability of the dividend, which currently yields 6%. It sets the company up as a potentially attractive investment for income-focused investors.
UPS’ transition year
There is always a range of outcomes in an investment, and the key driver for UPS is its future margin expansion in its core U.S. Domestic Package segment. Management’s strategy is to focus on higher-margin deliveries, notably in targeted end markets such as healthcare and small and medium-sized businesses (SMBs), rather than chasing volume growth.
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The strategy involves investing in automation and smart facilities to improve productivity and enable the closure of less productive facilities on the cost side. On the revenue side, UPS completed a so-called “glide-down” in reducing lower-margin deliveries for Amazon (NASDAQ: AMZN) by 50% from the start of 2025 to the middle of 2026.
All told, the bullish case sees UPS emerging from the glide-down as a leaner, more productive company, building profit margins and free cash flow from the base of a transformed business in 2026.
The dividend contribution
Building on the bullish case, UPS offers a combination of dividend income and share-price appreciation in the coming years. Starting with the dividend, management’s stated policy is to target a 50% payout ratio of the previous year’s earnings. Given that management’s 2026 guidance calls for $7.28 in annual earnings per share (EPS) and the current dividend per share is $6.56, I will conservatively assume no dividend growth over the next three years. A $10,000 investment at today’s prices gives you about 91.6 shares of UPS stock, with annual dividends of about $600, or a total of $1,800 in dividend income for the period.
Base case for free cash flow in 2026 and 2029
Turning to the potential share-price appreciation, I’ll start with a base case for FCF in 2026. Management’s latest guidance is for $6.1 billion in FCF in 2026. I will adjust that for three reasons. First, UPS is set to use $1.4 billion in cash for its Driver Choice Program (a voluntary buyout program reflecting lower Amazon volumes) in 2026 , which won’t recur in future years. That can be added to the $6.1 billion figure to give a better underlying picture.
