Should You Buy UPS While It's Below $100?

The question posed in the headline for this story is interesting because a price of $100 would mean UPS (NYSE: UPS) stock would offer a hefty dividend yield of 6.56%. Obviously, any price below that would increase the yield. That amount of yield creates an enticing prospect for any investor seeking passive income.

But does it stand up to scrutiny? Here's the lowdown.

The investment proposition for UPS

UPS stock is one of the most intriguing on the market at the moment, not least because it presents investors with a smorgasbord of sometimes conflicting considerations.

Image source: Getty Images.

Typically, when investors examine high-yield blue-chip dividend stocks, they are evaluating a company in a mature industry with a relatively low growth rate, which often corresponds to the overall economic growth, typically measured by gross domestic product (GDP) growth, usually in the low single-digit range.

Such businesses are usually highly cash-generative and tend to return capital to shareholders in the form of dividends and buybacks, primarily because they struggle to find investments that can generate significant revenue growth or improve productivity, such as those that increase return on equity (RoE).

But here's the thing. Right now, UPS is:

• A company struggling to generate cash, at least enough cash to cover its $5.5 billion annual dividend and the $1 billion in buybacks management made earlier in the year.
• A company with optionality and an ongoing game plan to improve productivity and RoE.

As such, it's neither a mature cash cow type of company with a safe and sustainable dividend, nor is it a company that's arguably taking full advantage of its potential to generate RoE improvements through investing in its "network of the future" or more aggressively growing revenue in targeted markets like healthcare.

What's UPS management's game plan?

To be fair, UPS management's strategy has always been straightforward. Although it's only on track to generate $4.7 billion in free cash flow (FCF) this year, the company remains committed to maintaining its $5.5 billion dividend and has already completed $1 billion in share buybacks. Meanwhile, it's continuing its strategy of "gliding" down less profitable Amazon deliveries (by 50% from the end of 2024 to the middle of 2026) and growing its higher-margin small and medium-sized enterprise (SME) and healthcare deliveries.

Similarly, ongoing investments in productivity-enhancing technologies (such as smart facilities and automation) are creating opportunities for facility consolidation. Indeed, CEO Carol Tomé recently told investors that by the third quarter, "We closed an additional 19 buildings, bringing our total so far this year to 93 buildings." On the same earnings call, CFO Brian Dykes told investors that he expected to be above that, which is necessary to cover the $5.5 billion dividend "in the very near future."

The game plan is clear. Muddle through a difficult period where tariffs and trade conflicts are negatively impacting delivery volumes and profitable trade routes, while maintaining the dividend, and executing on Tomé's "better, not bigger" framework by shifting toward higher margin deliveries, even at the result of declining revenue.

Image source: Getty Images.

Question marks remain for UPS

Unfortunately, there are several question marks here. First, UPS's stated aim is to pay about 50% of its earnings in dividends. Given that Wall Street expects just $7.17 in earnings per share in 2026, it will be some years before UPS reaches the $13.12 necessary to meet that requirement. As for FCF, Wall Street projects $5.3 billion in FCF for 2026 and $4.75 billion for 2027. Either way, UPS will likely need to increase its debt to fund the dividend unless it beats market expectations.

Second, UPS has productivity and growth-enhancing investments, such as its digital access program for SMEs, or the technology investments discussed above. Moreover, it could accelerate its drive in specific end markets, as it did with its recently completed $1.6 billion acquisition of healthcare supply chain management company Andlauer.

Is UPS a stock to buy?

The bulls will see an opportunity to earn a significant dividend from a company generating underlying improvement that will eventually result in a more normal dividend cover via increased earnings.

Meanwhile, the bears view the dividend as committing the company to significant cash outlays, which it may not be able to cover without increasing debt, unless management or the board decides to change the dividend policy. The bears also see the potential for ongoing disruptions to trade flows and tariff impacts to hit SME deliveries and profitability.

On balance, it makes more sense to be bearish here because, as Tomé noted in the earnings call, "next year is when you're going to feel the full brunt of some of these tariffs hitting some of these SMBs" and "it's prudent to be a bit cautious on the outlook." Given that the current cash flow isn't covering the dividend or any buybacks, it's early to get too excited about UPS stock.

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.