Should Investors Worry About UPS' Dividend Sustainability?

Core Insights - United Parcel Service (UPS) has a current dividend yield of 6.7% and a five-year dividend growth rate of 14%, making it an attractive option for dividend investors [1] - However, concerns arise regarding the sustainability of future dividend growth due to an elevated payout ratio of 84%, which indicates a significant portion of net income is allocated to dividends [1][7] - Free cash flow has declined from a peak of $9 billion in 2022 to $6.3 billion in 2024, which is only slightly above the $5.4 billion in dividend payments, raising operational flexibility concerns [3][7] Dividend Changes - In February, UPS announced a 0.6% increase in its quarterly dividend, raising it by 1 cent to $1.64 per share, which annualizes to $6.56 [2] Comparative Analysis - Other companies in the transportation sector, such as Wabtec Corporation and Expeditors International, have also increased their dividends, with Wabtec raising its quarterly dividend by 25% and Expeditors by 5.5% [4][5] - UPS shares have decreased by 21.5% over the past six months, while Expeditors and Wabtec have seen smaller declines of 6.4% and 0.7%, respectively [6] Valuation Metrics - UPS trades at a forward price-to-earnings (P/E) ratio of 13.14, which is lower than Expeditors' P/E of 20.57 and Wabtec's P/E of 22.29, indicating that UPS may be undervalued compared to its peers [8] - The Zacks Consensus Estimate for UPS' earnings for 2025 and 2026 has been revised downward over the past 60 days, suggesting potential challenges ahead [10]