Here's Why UPS Stock Is a Buy Before July 29

Key Points

• Shares of United Parcel Service have fallen 50% since their peak.

• The company is reducing operating expenses and expanding margins.

• A dividend cut at UPS' next earnings would free up cash flow and help it rebuild.

• 10 stocks we like better than United Parcel Service ›

United Postal Service (NYSE: UPS), otherwise known as UPS, isn't exactly flying high these days. Shares are trading around $100, about where they stood before the pandemic. Fewer packages are moving through its network, and the dividend is unusually high -- historically high -- but not in a way that inspires confidence.

With its next earnings report due on July 29, many investors are bracing for a miss, a dividend cut, or both. Expectations couldn't be lower.

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But underneath the caution, UPS' margins are showing signs of life, with a management team that's executing on a cost reset that's already changing the math. With expectations in the basement, UPS might be setting up for the one thing Wall Street isn't pricing in: a measured return to form. Here's why UPS is a buy before July 29.

Image source: Getty Images.

Operating smarter, not bigger

Let's start here. The pandemic-era boom is long gone, and demand for packages has started to normalize. That's no secret. But what's been overlooked is how aggressively UPS is cutting costs to stay profitable in this slower environment. For one, the company is in the middle of a $3.5 billion cost reduction plan, which includes closing 73 facilities and trimming about 20,000 jobs.

It's not flashy, but it appears to be working. In the first quarter, U.S. domestic adjusted operating margin rose to 7%, up 110 basis points year over year, while international stayed strong at 15%. Revenue per package was also up 4.5%, even with volume down. In other words, UPS is moving fewer packages, but making more on each one -- and that's starting to show up on the balance sheet.

UPS data by YCharts

Second, UPS is moving away from lower-margin work, and that includes scaling back its relationship with Amazon. Back in January, the company said it plans to cut Amazon deliveries by 50% by mid-2026. The news caught investors' attention -- Amazon made up nearly 12% of UPS' 2024 revenue -- but it makes sense as those shipments weren't pulling their weight on profit.

CEO Carol Tome summed it up nicely when she said on a call with analysts, "Amazon is our largest customer, but it's not our most profitable customer."

Stepping back from Amazon will, in theory, free UPS to prioritize routes and clients that could actually move the needle on profit. And that's the bigger story: The headline numbers might look flat, but the underlying business appears to be moving in the right direction.

A dividend cut could unlock more upside

Let's talk about the elephant in the room. At 6.6%, UPS' dividend yield is the highest it's been ever, and that's not because management suddenly turned generous overnight. It's because the stock fell about 30% over the past year while the dividend stayed unchanged.

UPS Dividend Yield data by YCharts

The result of this high dividend is that free cash flow (FCF) is being exhausted just to keep the wheels turning. Consider that in Q1, UPS generated about $1.5 billion in free cash flow, and then dished out $1.3 billion in dividends. And for the year, management guided toward roughly $5.7 billion in FCF against $5.5 billion in dividend commitment. In short, there's just no breathing room anymore.

That's why cutting the dividend on July 29 wouldn't be a disaster. It might, in fact, be the smartest move UPS can make. Freeing up even a few billion dollars in annual cash would allow the company to reinvest in automation, green fleet upgrades, and network tech, all of which are critical for its long-term competitiveness.

The reset is already priced in

If you're waiting for the perfect quarter, you could be waiting for some time. UPS still faces many risks. Global tariffs could further disrupt freight flows, and labor costs remain elevated after 2023's union contract. And missing 2025 guidance -- after falling short in both 2023 and 2024 -- wouldn't exactly inspire investor confidence.

But all of this is known. In fact, I think it's priced in. The stock trades at just 14.5 times trailing earnings, and near its pre-pandemic levels. That's a steep discount for a company with stable cash flow, rising margins, and path to profitability. If UPS shows even a whiff of margin expansion or delivers a thoughtful dividend reset, the market may respond sharply.

To be sure, UPS has more work to get its business where it needs to be. But with management cutting fat, rebuilding efficiency, and facing reality, it's setting itself up for a rebound. For investors who believe the company provides an essential service, and who are OK taking on some near-term turbulence, UPS might be worth a closer look.

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Steven Porrello 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.