If you ever come across the phrase "quality of earnings" and wonder what it means, then UPS (UPS 3.97%) in 2025 is a good place to start thinking about it. Or rather, in this case, the quality of cash flow. The company's cash flow is a major debating point, not because the $5.5 billion in free cash flow (FCF) in 2025 barely covered the dividend payout of $5.4 billion. However, there are a couple of quality concerns around even that FCF figure.
Red flags for UPS
The two issues identified here -- namely, UPS raising cash by selling properties, and generating profit from fuel surcharges -- are things that the company can't rely on forever.
Image source: Getty Images.
UPS generated $700 million in cash from the sale of businesses, property, and plant and equipment in 2025. Stripping that figure out from UPS' stated $5.47 billion leads to FCF of $4.765 billion, which is what Wall Street uses, according to S&P Global Market Intelligence.
And, as recently discussed, UPS has made money from its fuel surcharge over the last couple of years. Transportation fuel costs fell by $409 million in 2024, but fuel surcharge revenue only decreased by $270 million.
NYSE: UPS
Key Data Points
Turning to 2025, fuel surcharge revenue increased by $282 million in the U.S., but "Fuel expense decreased $50 million, mainly attributable to lower prices for jet fuel, diesel, and gasoline, partially offset by the impact of increases in flight activity," according to UPS's 10-K filing.
It's a net benefit of $332 million, and applying the company's effective tax rate of 23.7% yields a rough estimate of $253 million in FCF benefit. In other words, UPS had $900 million ($700 million plus $253 million) in FCF in 2025, which might not necessarily repeat in 2026 and beyond.
Management's cash flow guidance for 2026
To be fair, UPS is in the middle of a fundamental transformation, voluntarily reducing lower-margin Amazon delivery volumes, investing in productivity initiatives (including automation and smart facilities), and reducing locations as part of its plan. Moreover, management hasn't increased the dividend this year, and chief financial officer Brian Dykes recently promised to grow earnings to get the payout ratio back into a 50% to 60% range.
For reference, the 2025 dividend of $6.55 was 91.5% of normalized earnings per share of $7.16, so it could be a while before UPS increases its dividend again.
What it means to UPS investors
Management is guiding toward $6.5 billion in FCF in 2026, but it's not clear how much of that will come from property sales, or even fuel surcharges over costs, and that figure doesn't include "the financial impact of a voluntary driver separation program." In other words, the FCF guidance probably includes the positive from the restructuring (property sales), but not the negatives (voluntary separations).
All told, given the threat to its international business from a prolonged conflict in the Persian Gulf, the quality of its FCF in 2025, and questions around the 2026 FCF assumptions, it's worth monitoring events closely at UPS before buying in.
