That headline poses an intriguing question, because there are several potential outcomes for UPS (UPS 2.81%) over the next three years, and they differ significantly from each other. As always, management's decisions will have a direct impact on the business' trajectory. So, let's take a closer look at what investors might expect from the company.
UPS' plans
Management outlined its plans through 2026 at its investor and analyst day last year. In a nutshell, they involve doubling down on previously successful investments in key end markets -- such as small and medium-sized businesses (SMBs) and healthcare -- and investing heavily in productivity-enhancing technologies (smart facilities, automation, etc.) to build what it calls the "network of the future."
NYSE: UPS
Key Data Points
The network investments are not just about increasing productivity and lowering its cost per package; UPS can also close unproductive facilities, since the newly modernized ones can handle delivery volumes previously handled in the facilities to be consolidated. And management was hopeful that the excess capacity in the U.S. small-package market (built up during the boom years of the lockdowns) would disappear as demand picked up and supply growth was tempered.
Also, at the start of 2025, management announced plans to reduce Amazon deliveries (which tend to have low or even negative profit margins) by 50% by the beginning of the second half of 2026. Furthermore, it would take back last-mile delivery for its SurePost service from the Postal Service starting in January 2025.
All of these plans make sense, not least for a company seeking to optimize the productivity of its network by transitioning from lower-margin, lower-productivity deliveries to higher-margin, higher-productivity ones.
Image source: Getty Images.
What's going wrong with UPS
Unfortunately, UPS faces significant challenges meeting these aims, and many of them are a result of the ongoing and evolving tariff conflict. It's no surprise that anything that damages global trade is bad news for package delivery companies, and UPS faces specific challenges.
As CEO Carol Tomé said on the earnings call in April, the "China to U.S. trade lines are our most profitable trade lines." That's hitting UPS' international business, and the trade conflict is also inordinately affecting its key SMB market, because according to Tomé: "Many of our SMBs, as we talk to them, are 100% single-sourced from China. And this is causing so much uncertainty in the marketplace."
Since management had been hoping for the demand/supply gap to close in the small-package market through 2024-2026, the last thing it needs to see is a negative effect on SMB volumes.
The uncertainty is such that, for the second straight quarter, UPS declined to update its full-year guidance.
Image source: Getty Images.
What Wall Street thinks about UPS
In the absence of management guidance, let's turn to the Wall Street consensus, which looks at earnings before interest, taxation, depreciation, and amortization (EBITDA) and free cash flow (FCF).
These forecasts are problematic, to say the least, and as previously noted, UPS is paying out $5.5 billion in cash in the form of dividends. As such, according to Wall Street estimates, UPS will use more than 90% of its FCF to pay dividends in 2027, and this assumes there are no more major hiccups along the way.
Data source: marketscreener.com, Chart by author
Where will UPS be in a few years?
The optimistic scenario envisions the company navigating a challenging period, with end demand gradually increasing as SMBs adapt to the new tariff standard, healthcare revenue continuing to grow, and management successfully executing its cost reductions and productivity enhancements.
A pessimistic scenario envisions the continuation of tariff disputes leading to a reset of near- to medium-term expectations, a dividend cut, and a lasting structural challenge to its key SMB market.
It looks likely, at least to me, that a combination of the two scenarios is the most likely outcome. The company's near-term guidance is under threat, and it makes sense to cut the dividend and reinvest the savings in accelerating investment in the business as a whole to continue the transition to higher-margin deliveries and technology-led cost savings.
Under this scenario, UPS will be in a better place in a few years, but not before there's a reset of expectations, and possibly the dividend, too -- not something many investors will want to see. That scenario could mean the stock's decline worsens before it improves.
