UPS (NYSE: UPS) has delivered dividends consistently for decades. Except for 2009, when it kept the dividend steady, UPS has lifted the payout to shareholders every year since 1999 – and that includes a 5% increase in February.
But can the package delivery company continue to pay the current quarterly dividend of $1.01 per share?
The numbers say it can’t.
Free cash flow has been inconsistent over the past few years, turning negative in 2017 and dropping precipitously last year.
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Both one- and three-year cash flow growth are negative. This year’s projected free cash flow growth is barely above 2016’s.
However, business will certainly be impacted by the coronavirus. As the economy grinds to a halt, fewer packages are being sent.
Additionally, airlines are getting into the cargo business in order to make up for lost revenue. I don’t expect them to have a large impact, but every little bit hurts UPS, especially when free cash flow was already expected to be close to 2016’s total.
Furthermore, the payout ratio is too high for me to be comfortable.
Last year, UPS paid out $3.2 billion in dividends while generating $2.3 billion in free cash flow. So it didn’t even generate enough cash to pay the dividend.
In 2020, the company is expected to pay $3.3 billion in dividends on $3.7 billion in free cash flow for a too-high payout ratio of 89%.
Typically, I like to see a payout ratio of 75% or lower. That gives us a buffer if things get tough, like they probably will this year. I wouldn’t be surprised if free cash flow dips below the amount paid to shareholders due to the economic slowdown.
UPS has a terrific track record of paying dividends. However, the numbers just don’t work. If they get any worse than currently expected, the dividend could be in jeopardy.
Dividend Safety Rating: F
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About Marc Lichtenfeld
Marc Lichtenfeld is the Chief Income Strategist of Investment U’s publisher, The Oxford Club. He has more than three decades of experience in the market and a dedicated following of more than 500,000 investors.
After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Over the years, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report, among other outlets. Prior to joining The Oxford Club, he was a senior columnist at Jim Cramer’s TheStreet. Today, he is a sought-after media guest who has appeared on CNBC, Fox Business and Yahoo Finance.
Marc shares his financial advice via The Oxford Club’s free daily e-letter called Wealthy Retirement and a monthly, income-focused newsletter called The Oxford Income Letter. He also runs four subscription-based trading services: Technical Pattern Profits, Penny Options Trader, Oxford Bond Advantage and Predictive Profits.
His first book, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns, achieved bestseller status shortly after its release in 2012, and the second edition was named the 2018 Book of the Year by the Institute for Financial Literacy. It has been published in four languages. In early 2018, Marc released his second book, You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners, which hit No. 1 on Amazon’s bestseller list. It was named the 2019 Book of the Year by the Institute for Financial Literacy.
