UPS (UPS +0.22%) management surprised the market with its fourth-quarter earnings and guidance last week. The most salient update was free-cash-flow (FCF) guidance for $6.5 billion in 2026, up from an adjusted figure of $5.5 billion in 2025. That will be more than enough to cover its planned $5.4 billion in dividends, which currently yield 6.1%.

As such, the stock appears highly attractive to investors seeking passive income. Still, is it enough to make the stock a buy?

Image source: Getty Images.

UPS guidance

The guidance for FCF of $6.5 billion in 2026 is significantly above the Wall Street analyst consensus of $5.3 billion going into the earnings report. To be fair, it’s something CFO Brian Dykes said would happen back in October, when discussing FCF in the context of covering the dividend: “We’ve got a dividend of around $5.4 billion to $5.5 billion, and we expect it [free cash flow] to be above that in the very near future.”

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What UPS has to do to hit guidance

The case for investing in UPS centers on its plan to focus on more profitable deliveries, such as those for small and medium-sized businesses (SMBs) and healthcare operations. By moving away from lower-margin deliveries, such as those from Amazon, UPS aims to become a more profitable, cash-generating company.

Those adjustments involve investing in automation and smart facilities to improve productivity (allowing for 93 building closures in 2025 with plans for another 24 in the first half of 2026). In addition, CEO Carol Tomé said UPS had 127 buildings automated at the end of 2025 and planned to add another 24 in 2026, resulting in 68% of U.S. volume processed through automated facilities at the end of 2026, up from 66.5% at the end of 2025. She also noted cost per piece (CPP) was 28% lower in automated buildings.

All these changes are expected to result in U.S. cost per piec normalizing from an adjusted rate of 7.2% in 2025 to “kind of normal inflation level,” according to Dykes, on the earnings call. At the same time, management expects revenue per piece (RPP) to grow by a mid-single-digit percentage in 2026.

As such, management expects to end 2026 with revenue per piece above cost per piece as part of a year of inflection characterized by declining revenue (as Amazon deliveries continue to decline) and operating profit margins in the first half. This is expected to lead to a reversal of fortune in the second half as non-Amazon SMB deliveries and enterprise deliveries grow at a mid-single-digit rate, resulting in revenue and margin expansion.

UPS should exit 2026 in good shape

The result is forecast to be slightly better revenue growth and a similar adjusted operating profit.

Data source: UPS presentations.

Although the 2026 headline guidance may not stand out, the main takeaway is that UPS will reach a turning point in 2026. By the end of the year, profit margins should expand, revenue per piece will grow faster than cost per piece, and the company will generate higher-quality revenue thanks to less reliance on Amazon and greater growth in healthcare and SMB revenue.

In addition to the $3.5 billion in savings generated in 2025, management plans another $3 billion in cost savings as it lays off 30,000 workers and closes buildings. Meanwhile, the FCF estimate of $6.5 billion is supported by an intended reduction in capital spending to $3 billion in 2026 from $3.7 billion in 2025.

Image source: Getty Images.

Is UPS stock a buy?

Based on management’s outlook, UPS stock is attractive and will suit investors seeking passive income. That said, the tale of two halves means investors will have to be patient to see the full benefits of management’s actions in the numbers. Furthermore, investors are entitled to ask whether the capital spending cut and the $5.4 billion in dividends are holding back investment in automation and technology (further improving productivity) or investments to fuel revenue growth in chosen end markets.

UPS looks good as a cautious buy for investors right now, but there’s a lot of work to do before it hits the forecast numbers that make its stock look attractive.