United Parcel Service (NYSE:UPS) reports third-quarter results next Tuesday, and its last report left an odd result to explain. The company delivered fewer packages in the U.S. than a year earlier and still earned more on them.
Average daily U.S. volume fell to 16.0 million packages from 16.55 million, yet the adjusted operating profit of that business rose 21.0%. But a company that shrinks on purpose still has to pay a large dividend, and that is the question hanging over the stock.
UPS picks up and delivers packages for businesses and online shoppers in more than 200 countries and territories. The facts show the shrinking worked, the dividend looks covered while margins keep rising, and the share price already assumes little growth.
UPS Is Charging More for Fewer Packages
The drop in volume was a plan, not an accident. Chief Executive Carol Tomé said in the earnings release that UPS had finished pulling back its Amazon deliveries. She added that the network changes around that pullback also went as designed.
With fewer packages to move, UPS raised its prices. U.S. revenue rose 6.0% even as volume fell, because revenue per package climbed 9.3%. For a company whose sales grew about 1% a year over the past five years, that is a real change in how it makes money.
The gains were not limited to the U.S. International revenue grew, and so did the supply chain unit, helped by freight forwarding and healthcare logistics. If you’re looking for more logistics exposure, check out 10 Best Logistics Stocks to Buy Right Now.
Leonard Zhukovsky / Shutterstock.com
Margins and Guidance Both Moved Up
Higher prices and cost cuts showed up in the margin. Adjusted operating margin reached 9.2% last quarter, up from 8.8% a year earlier, and UPS raised its full-year adjusted operating profit target to about $8.65 billion. The company also expects its efficiency programs to deliver about $3 billion of savings this year.
One-time costs hide some of this in reported results. Earnings per share under standard accounting were far below the adjusted figure after $891 million in charges, tied mostly to employees leaving under the Driver Choice Program. International profit also fell, even as its revenue grew.
Cash Flow Must Keep Covering the Dividend
The company expects to pay about $5.4 billion in dividends this year, subject to board approval, while it is still absorbing restructuring costs, and that payout is the main worry. Free cash flow in the first six months was $1,573 million, up from $742 million a year earlier.
Those costs are meant to fade, with the restructuring work expected to finish by next year. Rising cash flow and a raised profit target argue the payout can be funded, but only if margins keep climbing. Profit margin over the past 12 months was 5.08%, a thin cushion if pricing slips. A stock with that cushion can turn one weak quarter into a fresh dividend debate. For investors looking for dividend stocks yielding at least 5%, our list of 10 Best Dividend Stocks Yielding at Least 5% to Buy According to Hedge Funds is worth a look.
The Stock Price Assumes Little Growth
At about 13.7 times estimated 2026 earnings, the stock sits below the sector median of about 19.1 and its own five-year average of about 15.7. Those multiples rest on adjusted earnings, which run well above reported figures after the charges.
Analysts expect adjusted earnings per share to grow just 0.61% this year, which explains the discount, since the market is paying little for 2026. If you own the stock, you are betting that profit growth returns after this year, which is what the savings and the pricing gains are meant to deliver. If you’re interested in undervalued NYSE stocks, we recently compiled a report on 10 Most Undervalued NYSE Stocks to Invest In.
So the dividend looks covered as long as margins keep rising, and the price already allows for slow growth, which is a measured answer to the headline’s question. Next Tuesday’s report will show whether the U.S. business holds the 8.0% adjusted margin from last quarter and whether free cash flow keeps climbing.
While we acknowledge the risk and potential of UPS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than UPS and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: Verizon (VZ): Can Fixed Wireless Grow Without Squeezing Mobile Network Returns? and Coca-Cola (KO): Is Zero Sugar Creating New Demand or Shifting Existing Sales?
This article is originally published at Insider Monkey.
