The two package delivery giants continue to compete intensively in the marketplace. Still, there's only one winner in terms of stock price performance over recent years, with FedEx (FDX +1.95%) stock outpacing UPS (UPS +1.58%) stock. However, I think UPS is a better long-term buy, but with one important caveat.
UPS growth strategy
The company's growth strategy makes sense. Under CEO Carol Tomé, UPS has accelerated its transition toward more targeted end markets and deliveries rather than chasing delivery volume.
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This strategy entails aiming to voluntarily reduce low- or negative-margin Amazon deliveries by 50% from the start of 2025 to the middle of 2026. For reference, FedEx is filling in some of the void left by UPS and resuming delivery for Amazon after previously ending the service in 2019.
NYSE: UPS
Key Data Points
It also involves targeted growth in end markets like small and medium-sized businesses (SMBs), healthcare, and business-to-business e-commerce. At the same time, its investments in technology (automation, smart facilities, etc.) will increase productivity and allow it to rationalize facilities.
Instead of making low- and negative-margin deliveries to costly and hard-to-find residential addresses, UPS is pivoting toward higher-priced, higher-margin deliveries for small businesses and healthcare companies. Moreover, this pivot is enabling substantial cost reductions and job reductions.
The caveat
These changes make perfect sense. However, the reality is that UPS is a company that has missed its initial full-year guidance for three consecutive years, largely due to weaker-than-anticipated U.S. delivery volumes.
As such, its trading conditions have deteriorated to the point where the Wall Street analyst consensus implies it won't generate the free cash flow (FCF) necessary to cover its near $5.5 billion dividend payout. In addition, the full impact of the Trump tariffs hasn't hit SMBs as yet, as many of them would have run down existing inventory or switched to suppliers from countries that have now had tariffs imposed on them.
UPS' long-term strategy makes sense, but there's near-term risk around its earnings at a time of very limited dividend cover. Investors buying into the stock need to be willing to tolerate the potential for near-term risk.
