Key Points
UPS finished its planned cut in Amazon volume in June.
The company's U.S. domestic adjusted operating margin rose to 8% in the second quarter, up from 4% in the first.
Management's 2026 free cash flow goal is just above the dividend payments it expects this year.
Shares of UPS (NYSE:UPS) reached their all-time closing high of $232.11 on Feb. 2, 2022. As I write this, the stock trades around $100, about 57% off its peak and close to where it began 2026.
The fall has sent the dividend yield up to about 6.5%, based on the company's $1.64 quarterly payout. For a company so well known, a yield that size stands out, and it puts a lot of weight on what UPS reports next.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
The parcel giant posts its third-quarter results before the market opens on Tuesday, Oct. 27. It'll be the first full quarter after UPS finished cutting the volume it handles for its biggest customer, Amazon.
Image source: The Motley Fool.
Earnings did most of the falling
A 57% slide might look like a market overreaction. But most of this one reflects a sharp fall in profits. In 2022, UPS earned $12.94 per share on a non-GAAP (adjusted) basis. For 2026, management expects around $7.22 -- a decline of about 44%.
Some of that drop was by design. In January 2025, UPS said it had reached an agreement in principle with its biggest customer to cut that customer's volume by over 50% by the second half of 2026. Management said in late August that the Amazon cutback, and the network revamp built around it, finished in June.
Sure, the stock fell hard. But so did the earnings underneath it, and that's why I don't think the size of the drop alone makes UPS a bargain. Has that slide finally bottomed?
A leaner network
The early signs are promising. Showing what the cut was meant to achieve, UPS's second-quarter U.S. domestic revenue grew 6% year over year even as average daily volume slid 3.3%. Revenue per piece jumped 9.3%. The segment's adjusted operating margin widened to 8% from 7% in the year-ago quarter, and from just 4% in the first quarter of 2026. Also, its adjusted operating profit rose 21% year over year to around $1.2 billion.
Cost cutting is doing a lot of the work. UPS said its network and efficiency programs produced around $1.2 billion in benefits from January to June, and it expects about $3 billion for all of 2026. That leaves around $1.8 billion yet to come in the last six months -- more than the first half delivered.
The third quarter probably won't look as strong as the second, though. Management guided for about flat U.S. domestic revenue and an adjusted operating margin of around 7% for the segment in the third quarter.
But reaching that target means beating the 6.4% margin UPS reported in the same quarter last year. And management expects the segment's margin to average around 8.8% over the second half.
The second half has to deliver
Tuesday's report is the first test of that second-half forecast. First-half adjusted earnings per share were $2.82, so meeting the full-year target requires about $4.40 from July to December.
That looks like modest growth over the $4.12 UPS made in the back half of 2025. But last year's third-quarter result of $1.74 included a $0.30 bump from a gain on a sale-leaseback of five properties. Take that out, and second-half earnings per share have to climb around 15% year over year.
In other words, a third-quarter number below last year's $1.74 wouldn't necessarily mean the plan is slipping.
Cash flow arguably counts even more for a stock yielding 6.5%. Management expects around $5.5 billion of free cash flow for 2026, including employee separation payments linked to its Driver Choice Program, against about $5.4 billion in dividend payments.
UPS produced around $1.6 billion in free cash flow through June. So it needs around $3.9 billion over the rest of the year to meet the target. That would cover the remaining $2.7 billion or so in dividends, but not by much.
Meanwhile, the stock's valuation looks fair. Shares trade at around 13 times earnings expected for 2027, a large discount to the S&P 500 (SNPINDEX:^GSPC), which trades at about 19 times forward earnings.
So, is UPS stock a buy before Tuesday? I think it's worth a look at this price, especially for income investors willing to wait for the turnaround to show up in cash flow. The company has shed its least profitable volume, and the margins for its largest segment are going in the right direction.
Of course, one quarter could easily disappoint, and the dividend leaves little slack if second-half cash flow comes up short. But at that valuation, the stock price already seems to reflect a good deal of that risk.
Daniel Sparks and his clients do not have positions 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.