UPS Just Delivered Good News, Bad News, and Great News for Investors

Core Viewpoint - United Parcel Service (UPS) is showing signs of a turnaround, with a stock increase of approximately 25% over the last four months, despite mixed results in its Q4 2025 earnings report [1] Good News - UPS exceeded Wall Street expectations in Q4, generating revenue of $24.5 billion, surpassing the average estimate of $24 billion, and reported adjusted earnings per share (EPS) of $2.38, above the consensus estimate of $2.20 [2] - CEO Carol Tomé highlighted strong revenue quality and solid cost management as key drivers of the results, noting the highest Q4 revenue in four years for the international small package business [3] - Despite a 10.8% year-over-year decline in U.S. daily volume, revenue per piece increased by 8.3%, indicating a successful focus on revenue quality [4] - The company achieved its highest small- and medium-sized business (SMB) penetration in history during Q4, and business-to-business (B2B) penetration reached the highest level in six years, with healthcare logistics identified as a robust growth area [5] Bad News - Following the Q4 update, UPS shares fell moderately as investors focused on negative outlooks, anticipating a 30% year-over-year profit decline in Q1 2026 [7][8] - Factors contributing to the weak first half of 2026 include a decline in Amazon volume, transition costs from shifting Ground Saver back to the U.S. Postal Service, higher costs from retiring the MD-11 aircraft fleet, and tariff impacts [9] Great News - UPS is expected to experience an inflection point in 2026, shifting focus from shrinking its business to growth in higher-margin areas, with the Amazon glide-down expected to be completed this year [10] - Although overall shipment volume may decline, UPS anticipates a lower cost structure and a more agile network due to the Amazon strategy [10] - For income investors, the dividend yield is projected to be more secure in 2026, with expected free cash flow of $6.5 billion and planned dividends of around $5.4 billion, subject to board approval [11] - The voluntary driver separation program is expected to enhance future free cash flow, making a dividend cut unlikely in the near term [12]