United Parcel Service (UPS) has endured a challenging period with its stock value falling by more than 50% from its peak in recent years. Despite this downturn, the company’s dividend yield has risen notably to 6.5%, highlighting investor attention to its income potential amid a difficult operating environment. UPS has faced several persistent challenges including elevated labor costs, tariffs, weakening demand conditions, and importantly, a strategic pivot to lessen its dependence on Amazon, which has been a significant shipping client.
UPS’s decision to substantially reduce the volume of shipments dedicated to Amazon—over 50% cut planned by the end of next year—reflects a crucial turning point. While shipments for Amazon account for approximately 20% to 25% of UPS’s overall volume, these shipments contribute just 11% to revenue, indicative of the lower profit margins on this business segment. This strategic shift aims to improve the company’s profitability profile by focusing on higher-margin operations.
To support this transformation, UPS is undertaking a comprehensive restructuring effort targeting $3.5 billion in cost reductions by the end of the current year. Measures include workforce reductions and the closure of select facilities, with the goal of enhancing operational efficiency and streamlining the company’s footprint.
Alongside cost-cutting, UPS is actively investing in expanding its more lucrative segments, notably healthcare logistics. In November, the company completed its acquisition of Andlauer Healthcare Group for $1.6 billion, an investment expected to enhance its capacity to manage complex healthcare supply chains and strengthen its service offerings in this specialized market.
Operational results in the near term reflect the transitional challenges. Revenue declined by 3.7% in the third quarter, accompanied by a slight decrease of 1.1% in adjusted earnings per share. However, encouraging signs emerged as U.S. revenue per shipment increased by 9.8% during the quarter, and domestic operating margins saw modest improvement, suggesting better profitability per unit of business handled.
Moreover, some of the broader sector headwinds appear to be easing. Competitor FedEx reported stronger-than-anticipated fiscal second-quarter outcomes despite ongoing trade and market uncertainties and subsequently raised its full-year guidance. UPS’s own guidance for the upcoming quarter has exceeded expectations, implying potential strengthening in demand or improved cost management.
Financially, UPS’s free cash flow performance is on an upward trajectory, generating $2 billion in the third quarter alone compared with $742 million during the first half of the year. This improvement reflects the effectiveness of the company’s restructuring initiatives, having achieved $2.2 billion in cost savings toward its $3.5 billion target by the end of the third quarter, thus bolstering the sustainability of its high dividend payout.
As UPS continues to realign its business strategy by reducing low-margin volumes and investing in higher-value logistics sectors, while also reining in costs and improving cash flow, the company appears poised to regain momentum. These measures may enable UPS to realize robust total returns for investors through stock price appreciation combined with attractive dividend income if market conditions remain supportive and restructuring efforts continue as planned.