Lee Samaha, The Motley Fool

Sat, May 24, 2025, 1:33 AM5 min read

• Its dividend isn't well covered by its current free cash flow generation.

• The company is taking measures to improve profitability and return on equity.

• Cutting the dividend may be in the best interest of long-term investors.

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There's a good case for buying UPS (NYSE: UPS) stock, and an even better one for buying the stock if it cuts its dividend. It's not just about ensuring that the dividend is adequately supported by cash flow generation in the short term; it's also essential to guarantee that management can fully capitalize on the growth opportunities created by its current actions.

In a previous article on UPS, I outlined how management's pre-Liberation Day guidance for 2025 called for $5.7 billion in free cash flow (FCF) when its dividend payment is $5.5 billion, and management plans $1 billion in share buybacks. However, since then, the tariff escalation has undoubtedly impacted the global economy, and UPS declined to update its full-year guidance on its first-quarter earnings call in late April.

As such, it's not difficult to see that UPS might be unable to cover its dividend with FCF if it misses its FCF estimate. As for the share buybacks, management has considered debt-financing them as the dividend on the stocks repurchased could be higher than the after-tax debt cost.

But here's the thing. Following the same logic, it's not going to make sense to debt-finance a dividend (which UPS may have to do if its FCF falls short of guidance) if the dividend yield is more than the after-tax debt cost.

Moreover, there's another major reason to cut the dividend, and it doesn't stem from sustainability considerations. Instead, it comes from the argument that it's in the best interests of shareholders because it frees up resources for management to generate value for them.

Fellow writer Sean Williams believes UPS might be a stock Warren Buffett is buying, and in one aspect, UPS is the kind of stock he might buy. Buffett is known for buying stocks that can improve their return on equity, or assets, but not necessarily their revenue or earnings.

It's doing so as part of its plan to repurpose its network to handle more selected and higher-margin deliveries. This plan has a few key parts.

• A conscious decision to reduce low or negative-margin deliveries for Amazon.com by 50% from the start of 2025 to the second half of 2026 -- Amazon made up 11.8% of total company revenue in 2024.

• Investments in automation and smart facilities will increase productivity, allow UPS to consolidate less-productive facilities, and lower the cost per package.

• Management plans to grow its small and medium-sized business (SMBs) and healthcare revenue and shift to higher-margin deliveries.

• On the investor day presentation in March 2024, management outlined plans to double its healthcare revenue from $10 billion in 2023 to $20 billion in 2026 , partly by making acquisitions.