The delivery giant's dividend looks sustainable, but there is little room for significant improvement in the coming years.
Investors attracted to UPS (UPS -0.92%) stock are, no doubt, drawn at least in part by its generous 4.7% dividend yield. But how sustainable is that payout, and what are the prospects that the company will continue its 15-year run of raising its dividend per share next year? Here's the lowdown.
UPS' dividend payout
Usually, when investors discuss a payout ratio, they compare dividends per share (DPS) with earnings per share (EPS). In this case, UPS' adjusted diluted EPS was $8.78 in 2023, and the Wall Street analyst consensus for EPS in 2024 was $8.23. The current UPS dividend is $1.63 a quarter, equating to $6.52 for the full year. As such, the payout ratio (DPS/EPS) for 2024 is estimated to be 79%.
Commenting on the matter during the recent earnings call, CEO Carol Tome said:
We have a targeted dividend payout ratio of 50%. We are higher than that. It's our intent to earn back into a 50% payout ratio over time. We have no intent to cut the dividend just to make that math work.
CFO Brian Newman reiterated UPS' commitment to "a stable and growing dividend."
How stable is UPS' dividend?
The dividend appears stable, provided 2024 proves to be a trough year for the company. Fortunately, that looks likely to be the case. UPS is working through some issues that hit the company hard last year, including a protracted labor contract negotiation -- the final agreement raised compensation costs, and the dispute caused customers to divert traffic in fear of strike action. Furthermore, delivery volumes declined with the slowdown in the economy.
Image source: Getty Images.
UPS is recovering from these issues while aiming to grow its healthcare and small and medium-sized business deliveries and making technology investments that should result in more efficient networks. Wall Street has UPS generating an EPS of $9.82 in 2025, which implies a 66% payout ratio based on this year's dividend.
All told, UPS' dividend looks sustainable; just don't expect much of an increase until the company hits its 50% payout ratio target.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
