UPS (UPS 1.05%) is one of the most fascinating investment propositions in the marketplace right now. Considering the long term, there is significant potential for substantial long-term appreciation. However, in the near term, there is potential for some disappointment, and there are real questions over the sustainability of its dividend. Here's the lowdown.

Can buying UPS stock set you up for life?

At the risk of losing half of you upfront, I'm going to cut to the chase. UPS is a stock that could generate great returns for investors, but be prepared for some potential near-term turbulence, and don't buy this stock if you are buying it mainly for its dividend.

I'll break this argument down into its parts so that readers can form their own opinions. Let's start with the long-term bullish case. It rests on the idea that management is fundamentally doing the right things for the business over the long term by migrating its delivery volumes toward higher-margin deliveries. In addition, it's taking the right measures to boost productivity through technology investments in its so-called "network of the future."

UPS strategic aims

At the heart of management's approach is a determination to optimize the profitability of its network rather than chasing volume growth and trying to generate earnings growth through scale. There are a few key parts:

• Focus on growing deliveries in targeted end markets where UPS is already established, such as small and medium-sized businesses (SMBs) and the healthcare sector.
• The decision, announced in January, to reduce Amazon.com deliveries by 50% by the second half of 2026 will result in fewer low- or negative-margin deliveries. Amazon deliveries can be costly to deliver, as they often contain bulky items and go to multiple, disparate, and hard-to-reach residential addresses.
• Investments in automation and smart facilities will create more productive facilities, enabling the consolidation of several less productive facilities.

The key aspect of these plans is that they build on initiatives that UPS is already undertaking and excelling in.

Image source: Getty Images.

Shifting to higher-margin deliveries and productivity measures

Let's take a look at the shift in delivery volume and revenue. SMBs accounted for 27% of UPS' U.S. delivery volumes in 2021, and by the first quarter of 2025, that figure had increased to 31.2%. Management has a long-term aspiration to get to 40% , and it will likely increase given the reduction in Amazon volume. Management expects it to be 35% of U.S. volume in 2026.

As for healthcare, management continues to expect a doubling in healthcare volumes from $10.5 billion in 2024 to $20 billion in 2026. As for Amazon, it contributed 11.8% of the total company revenue in 2024, which is approximately $10.7 billion.

Some simple math demonstrates that whereas higher-margin healthcare revenue and lower-margin Amazon revenue were roughly the same in 2024, by 2026, UPS could hit a run rate of $20 billion from healthcare and $5.3 billion from Amazon. Moreover, SMB volume is expected to grow significantly under UPS' plans as well. Since SMB volume is higher margin and higher priced, the relative shift in volume will lead to revenue and margin expansion.

Image source: Getty Images.

As for the "network of the future," UPS permanently closed 11 buildings in 2024 as it shifted 63% of its volume through automated facilities, compared to 60% in 2023. The company plans to invest in automation at 63 sites by 2028, resulting in $3 billion in annual savings.

Everything suggests that UPS will increase its margins and productivity over time.

The near-term issue

While the long-term picture is attractive, UPS is navigating a challenging period marked by ongoing trade disputes that negatively impact international trade. In addition, pre-tariff escalation guidance for free cash flow (FCF) of $5.7 billion in 2025 already implied it would barely cover its $5.5 billion in dividends. That cover is likely to be even less now that tariff escalations have impacted global trade and delivery volumes.

I won't belabor the point here but as previously discussed, there is a strong case for arguing that UPS should consider cutting its dividend particularly in light of the pressure on its earnings and cash-flow guidance for 2025. Moreover, freeing up cash by cutting the dividend would enable UPS to invest more and take advantage of its new, more productive network of the future, and grow its SMB, healthcare, and international revenue accordingly.

Image source: Getty Images.

A stock to buy

Investing in UPS could generate excellent long-term returns, but entry points do matter, and there is plenty of near-term risk associated with UPS. It all adds up to make the stock worth following closely and considering buying if management takes the right steps this year.