Where Will UPS Be in 3 Years?
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The short answer to the question in the headline is that United Parcel Service (UPS -3. 11%) is ly to be in a better place in a few years. Still,...
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July 8, 2025
07:14 AM
The Motley Fool
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The short answer to the question in the headline is that United Parcel Service (UPS -3. 11%) is ly to be in a better place in a few years
Still, the extent of the imvement is debatable, and the result will significantly affect the kind of return investors can expect from the stock
Here's what you need to know in UPS
The key to the UPS investment case The central argument here is that the underlying imvements in the, and those that will drive its earnings growth over the long term, are being obscured by a combination of near-term headwinds in its end, strategic operational decisions (notably the conscious decision to reduce Amazon deries), and the need to keep paying out $5. 5 billion in dividends
There's little UPS can do the first issue, its end
The second issue -- Amazon volume reduction -- is sensible, because it aligns with management's strategy of shifting to higher-margin deries to optimize its network
The third issue -- paying its sizable dividend -- is the challenge here and makes a dividend cut possible
Considering the curent financial position, cutting the dividend is what management should be doing now
I don't want to belabor the point cutting the dividend here, but rather to emphasize the imvements in the, which will make it a more attractive company in a few years
Four ways UPS can imve its There are four things to focus on, and they are all fundamental to management's goal of optimizing the fitability of its network: Expanding higher-margin healthcare-related deries
Growing its higher-margin deries for small and medium-sized es (SMBs) and capturing more market in the U
The aforementioned reduction in low- or negative-margin deries for Amazon
Investments in nology to build out its so-called Network of the Future
Growing healthcare revenue Management views expanding higher-margin healthcare deries as a key opportunity
In its Investor Day presentation, it outlined plans to double its healthcare revenue from $10 billion in 2023 to $20 billion by 2026
Putting those figures into context, UPS revenue was $91 billion in 2023 (making healthcare 11% of revenue), and Wall Street expects its sales to be $87. 8 billion in 2026
As such, healthcare revenue could grow to 22. 7% of revenue in 2026 -- a significant shift
To that end, UPS has acquired healthcare es since its Investor Day to achieve its objectives
It bought Frigo-Trans and Bio & Pharma Logistics (specialists in temperature-sensitive healthcare logistics) in January 2025, and the company agreed to buy Andlauer Healthcare Group for $1. 6 billion in April 2025
Image source: Getty Images
The opportunity in small and medium-sized es, and Amazon deries Management's plans for SMBs are equally ambitious, with the long-term goal of growing it to 40% of its total package volume in the U
The penetration rate increased from 27% in 2021 to 29% in 2023 and stood at 31. 2% as of the first quarter of 2025
The key to its aims here is its Digital Access gram (DAP), which gives SMBs access to enterprise-level shipping rates and services via UPS' partnership with e-commerce platforms used by SMBs
At the same time, UPS is aiming to reduce Amazon deries by 50% from the start of 2025 to June 2026
Management said that the e-commerce leader was responsible for 11. 8% of revenue in 2024, implying a figure of apximately $10
Reducing Amazon volume by 50%, all things being equal, could result in $5. 4 billion in run-rate revenue from Amazon in 2026
Underpinning these dramatic shifts in deries, the company will continue to invest in automation, robots, and smart facilities (its Network of the Future)
The ductivity imvements are expected to enable it to close 200 facilities by the end of 2028, resulting in $3 billion in annual cost savings
Image source: Getty Images
UPS in three years All told, UPS is going to be a significantly different company in a few years, with more healthcare and SMB revenue, and far fewer costly deries going to hard-to-find residential addresses, which are often associated with Amazon
The shift implies margin expansion (although the reduction in Amazon volume will reduce revenue), as does the investment in its network
Management could accelerate this cess by reducing its dividend, since it still faces an uncertain economy in 2025, as well as the complex task of fine-tuning the reduction in Amazon volumes
Still, either way, UPS is ly to be a stronger company in a few years
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors
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 has a disclosure policy.
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