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Why I'm Red-Flagging UPS

Is the iconic shipper in a ‘death spiral’?

by Herb Greenberg, August 16, 2025

To say UPS is a mess would be an understatement.

As is often the case, the story can best be told by a few charts, such as this one, which shows the rise in net debt...

Source: Fiscal AI (Click here for a full UPS overview)

While free cash flow is tumbling...

And operating margin is getting squeezed....

All of this is reflected in the company's stock, which along with most of its other metrics, had made UPS a star during the post-pandemic stay-at-home boom. Having a fairly new, well-liked CEO – Carol Tomé took the reins in the early days of Covid – didn’t hurt either. My, what a difference a few years make...

Concerns over a possible strike caused customers to flee and set in motion a series of events that suggests the worst is far from over for UPS. It also exposed the vulnerabilities of a business structure whose time has passed it by.

Which is where our story begins...

The Bull Case

But first the bull case, courtesy of Tenzing Memo, which I have found to be an exceptional source of getting up-to-speed on companies. This is an AI-generated summary...

UPS offers a compelling long-term investment case based on its global scale, entrenched logistics network, and strong brand. The company’s end-to-end delivery infrastructure, including a vast air and ground fleet, creates high barriers to entry and supports pricing power. UPS is actively reconfiguring its network and investing in automation, targeting $3.5 billion in annual cost savings, which should bolster margins. Its focus on higher-yielding segments—healthcare, small business, and international—positions it for profitable growth. While near-term headwinds include Amazon volume declines and labor cost inflation, UPS’s 7.5% dividend yield and reasonable valuation provide downside support. Execution on efficiency and growth initiatives is key. UPS offers attractive long-term upside if it executes on its transformation.

The Bear Case

Sounds good on paper. But make no mistake – UPS is struggling. It’s in a three-way vise:

On one hand, it’s being squeezed by the costs and restrictive controls of having 75% of its workforce unionized, which puts it at a competitive and technological disadvantage... not to mention the constant threat of renegotiating new labor contracts. The current contract with the Teamsters, who represent most of its employees, runs for three more years.
On the other, there’s FedEx, which has seized on its own competitive advantages – coming to the rescue of UPS workers looking for a shipper unlikely to face disruptions caused by union negotiations.
Finally, there’s Amazon, which is increasingly becoming a competitor in its own right. And which until recently, was also UPS’s largest customer. UPS is in what it calls a “glide down relationship” with Amazon – a relationship that generated explosive growth during Covid. But earlier this year, citing the unprofitable nature of its Amazon business, UPS announced plans to accelerate the glide down to eliminate half of all Amazon’s sales by next year. By the end of this year, the company says, it should be down 30%. “That’s not a glide down,” jokes Donald Broughton of Broughton Capital. “It’s an abortion.”

Broughton knows a thing or two, here. He focuses almost exclusively on all things transportation... and has followed UPS since its 1999 IPO. He’s well connected throughout the industry, including labor, with a deep institutional knowledge.

While I had done quite a bit of research into the company in 2021 when I was doing short-biased research, especially the Amazon angle, he and I first started chatting about the company in May 2023. That was when company was negotiating yet another contract with the Teamsters, which was set to expire in July of that year. As he recalled, the negotiations five years earlier had been “a gunfight,” regardless of how negotiations this time went, he was warning that the results would “destroy shareholder value.”

Which is exactly what happened...

Built for Another Era

But it’s what Broughton explained when we talked a few weeks ago that convinced me that the worst is far from over for UPS, and that even with its stock having been pummeled it remains risky. A big reason is that the company is saddled with an infrastructure built for another era... one that puts it at a distinct competitive disadvantage against FedEx, which along with others – including Amazon – is seizing the moment to steal customers. That can be seen clearly in this chart, which shows how after years of trying to play catch up, FedEx’s revenues are starting to pop above UPS’s...

Ditto for margins, where the gap between the two companies is narrowing...

Both of those can be seen in the performance of the stocks of both since 2023, as union negotiations became a concern...

The wild card to reverse all of this is UPS’s restructuring – it refers to this as “efficiency reimagined” – which it believes will have saved the company $3.5 billion by the end of this year.

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Underestimating the Magnitude'

That’s fine, but as Broughton suggests, but it won’t be that easy for UPS to right itself. As he told his clients last October, which is as true today as it was then...

Most sell-side analysts and many investors under-estimate the magnitude of the network costs and underappreciate how fixed most of those costs are.

That’s where this gets interesting...

Regardless of what UPS says, the way Broughton sees it, “a company is in a death spiral when it spends hundreds of billions of dollars over decades – as FedEx and UPS both have done.” By spending that much, he says, “you build barriers to entry. Nobody else can get into the business.”

And as a result, “the business has incredibly good, solid incremental margins. So if you add an incremental hundreds of thousands of packages to that network, they have a 30% to 40% incremental margin to them instead of 10% because you don’t have to hire other drivers or add more conveyor belts or another terminal. It’s all already there. By the same token, when you lose that business, you get a decremental margin, which weighs on the margin of remaining packages. It throws those costs back onto” what is rapidly becoming a bloated system.

Or as Broughton goes on to explain...

My point is that I don't remember them selling or closing a terminal. In my head, they’ve never talked about it because they own most of their real estate. FedEx’s ground facility to service New York is in Woodbridge, NJ. I know it’s still being depreciated because I was there when it opened.
The UPS facility for ground in New York is in the meatpacking district. They own an entire city block, which was acquired in the 1960s. They pay taxes and insurance on it. The building was long ago paid for and is fully depreciated.
As a result, the returns for UPS were overstated for years because the underlying asset base was so old. You can’t mark it to market, and you can’t continue to depreciate it. And they can’t sell it because they need it. If they lose half their business, they still needed the terminal.
So when they say they’re gliding down, it’s not even a glide down – it’s gliding down to a rocky cliff.

Put more bluntly...

They were surfing on a big wave – bigger than anybody else. Then the wave ends. Not only do they find themselves standing on the beach, but the tide goes out and they’re left sitting on a surfboard and they can’t go back.

How long will all of this take to settle out? Broughton says he isn’t convinced management really knows. After all, not only did the company initially misjudge the amount of Amazon business it would be slicing, but more recently it acknowledged the number of employees that would have left as a result of facility closings and other actions. Tomé now merely says she expects to hit the expected attrition rate “over time.”

In the meantime, there’s the dividend, which is the holy grail at UPS... having been increased for 16 straight years.

At its analyst day in May, Tomé called the dividend “the hallmark of our financial strength.” It’s so important that it’s ranked as second only to reinvesting in its business among its top capital allocation priorities. And that’s in front of “maintaining a strong financial condition.”

On the company’s latest earnings call in June she doubled down, saying, “We know how important the dividend is to our investors and you have our commitment to a stable and growing dividend.”

But Here's the Thing...

While management insists that the company is “rock solid strong,” something it has been saying for years, what’s clear from the numbers is that it’s less rock solid strong than it once was.

Look no further than the dividend, which thanks to the plunging stock price now yields around 7.5%. But that equals a payout ratio of 105%, which implies that UPS is paying out more in dividends than it earns. That combo – especially against the backdrop of sliding free cash flow – suggests management is stretching with the dividend.

In the meantime, Broughton believes Teamster workers, not happy with the company’s recent offer to buyout all of its drivers, are intentionally doing things more slowly... in other words, becoming less productive. At the same time, Amazon continues to build its own freight fleet as it now ships more than two-thirds of its own packages as well as packages for its third-party sellers, with the constant risk that Amazon will open up its freight business to a bigger base of potential customers. And FedEx appears to be finding its own footing, thanks to UPS.

Put another way, as Broughton sees it...

You have Amazon, Fedex and your own work force working against you.

To say the decks are stacked against it would be an understatement. Barring a sudden headline that the Teamsters are ceding all control to management, which is beyond unlikely, the chances of a turnaround anytime – let alone stabilization – would appear to be low. Which is why the risk for UPS remains high... and red flags continue to fly.

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