Here Are My Three Biggest Concerns Over UPS Stock

UPS (NYSE: UPS) consistently appears in value-stock investors' filters. After all, who doesn't like the sound of a blue chip stock yielding 6.4% and trading at just 14.3 times 2026 earnings expectations? In addition, there's an attractive strategic transformation underway that supports long-term margin improvement as management repurposes its network for higher-margin deliveries in targeted end markets. It's a compelling mix, but there are some concerns that investors need to address before buying the stock.

UPS strategy

The company is transforming away from chasing volume growth and toward higher-margin end markets such as small- and medium-sized businesses (SMBs), healthcare, and business-to-business (B2B) e-commerce deliveries. This involves the so-called Amazon.com (NASDAQ: AMZN) "glide down," whereby UPS reduced its Amazon delivery volume by 50% from the start of 2025 to the middle of 2026.

At the same time, it's investing in technology, notably automation and smart facilities, to improve productivity and operate a leaner, more profitable network. Everything points to a long-term future with higher margins, and the bullish case for the stock sees UPS emerging from the glide-down in 2026 (after incurring upfront, temporary costs associated with reducing its labor force by 78,000 and closing 150 buildings) into a higher-margin future.

Unfortunately, there are a few problems with it.

UPS quality of earnings

First, UPS appears to be generating revenue from fuel surcharges charged to customers, which is likely to prove unsustainable over time. To be fair, there may be other costs associated with higher fuel prices, but here's a look at the reported increase in fuel surcharges relative to fuel expenses.

Data source: UPS presentations. *UPS only reported the increase in U.S. Domestic package fuel surcharges.

This is not a high-quality way to generate earnings.

The dividend is constraining investment

Investments in productivity are working well for UPS, with CEO Carol Tome disclosing that "68.5% of the volume in our U.S. business was flowing through an automated building compared to 64% one year ago," and "the cost per piece in an automated building is about 28% lower than a non-automated building."

But here's the thing. UPS could theoretically invest more in its network and, arguably, be more aggressive in acquisitions to develop healthcare or SMB volumes if it didn't use so much of its free cash flow (FCF) paying out roughly $5.4 billion in dividends. Management expects $5.5 billion in FCF, but according to the Wall Street analyst consensus from Visible Alpha, this figure will include $291 million from property disposals related to the building closures. Without this unsustainable cash-flow source, UPS's FCF will not cover its dividend, and the dividend is arguably holding back capital spending.

Image source: Getty Images.

Amazon's launch of its supply chain services business is a genuine threat to UPS. The company has spent years building its supply chain network to support its own growth, but is now extending that expertise to offer supply chain services to customers beyond its marketplace sellers.

In addition, Amazon can sell more services to marketplace sellers who previously used only Amazon's services for activities related to Amazon's marketplace. This is a formidable threat to UPS and FedEx and needs to be taken seriously.

While UPS and FedEx have the business moat of a highly tuned, efficient network, the reality is that Amazon's entry could significantly constrain their ability to raise prices. Moreover, the strength of Amazon's relationships with SMBs could directly challenge UPS in a core growth market.

Image source: Getty Images.

A value stock to buy?

UPS is doing a lot of the right things, but cautious long-term investors may want to see how the company emerges from the Amazon "glide down" over the next few quarters before buying in. If successful, UPS investors can expect margin expansion in 2027, but it needs to improve the quality of its earnings and cash flow and demonstrate resilience to the Amazon threat before investors feel fully confident buying in.

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 recommends FedEx. The Motley Fool has a disclosure policy.