Is UPS the best dividend stock?

KBS‘ (KBS -0.28%) The present ahead dividend yield of round 4.4% may be very engaging to traders in search of revenue, however is the payout sustainable? The corporate’s earnings have been disappointing just lately, and dividend protection in 2024 seems to be fairly weak. Is UPS a inventory for dividend hunters? This is what you could know before you purchase shares.

UPS Dividends

Dividends over the previous 12 months price the corporate about $5.4 billion, and as you possibly can see under, after a disappointing 2023, free money circulation (FCF) per share did not cowl the dividend final yr. Clearly, this isn’t a sustainable scenario, and traders can buy UPS inventory extra for the place the corporate goes than for the place it simply got here from.

UPS Free Money Circulation Per Share information by YCharts

Though, to be honest, final yr was undoubtedly a nasty yr for UPS. Its shipments fell far more than administration anticipated resulting from a slowing economic system and a pure retreat from the increase of earlier years brought on by stay-at-home measures. As well as, a protracted labor dispute over a contract extension has pressured clients to divert volumes for concern of strikes.

The place UPS is headed

Nevertheless, administration plans to considerably enhance profitability and deliverables, in addition to develop per unit income in extra of price per unit, by way of the usage of applied sciences akin to automation to consolidate services and good services to enhance productiveness . As well as, UPS continues to develop small and medium enterprise (SMB) and healthcare revenues with higher profitability.

Administration goals to realize FCF of $5.9 billion to $6.7 billion in 2024 and in the end $17 billion to $18 billion from 2024 to 2026. The decrease finish of that determine would common $5.6 billion a yr, which might cowl dividends. Furthermore, the steering seems conservative, given a goal degree of $5.9 billion to $6.7 billion (earlier than pension contributions) in 2024 and a goal to succeed in roughly $7 billion in FCF in 2026. Wall Road analysts count on UPS to succeed in $18.3 billion in FCF from 2024 to 2026.

Nevertheless, whichever means you take a look at it, UPS’s FCF-to-dividend protection would not look nice. Nevertheless, that did not cease CEO Carol Thome from saying on a latest earnings name:

We now have a goal dividend payout ratio of fifty%. We’re above that. We intend to return 50% of payouts over time.

It went on to say it had “no intention” to chop the dividend, whereas outgoing CFO Brian Newman famous: “We’re dedicated to a secure and rising dividend.”

This can be a assured narrative from administration. Nevertheless, it is laborious to see a big enhance within the dividend given the type of FCF era administration has deliberate for the subsequent few years.

Ought to You Purchase UPS Inventory With Dividends?

The corporate is in restoration mode in 2024, and administration expects a turnaround in volumes through the yr, with comparisons to 2023 changing into simpler. As well as, profitability ought to enhance when it faces rising prices related to the brand new labor contract. in 2023.

Picture supply: Getty Pictures.

In the meantime, investments in know-how make sense, and UPS is hitting all of its inside income development targets for healthcare and small and medium-sized companies. Alternatively, any financial downturn, largely with overcapacity within the bundle supply trade, would hit UPS laborious and lift severe questions on its capital allocation technique, beginning with the dividend.

Alternatively, latest earnings confirmed that administration expects a “slight uptick” in home shipments within the second quarter, resulting in low single-digit development within the second half. That is a key quantity to regulate, as a result of if it holds, UPS can be on monitor to proceed working for the subsequent few years, persevering with to develop its dividend, albeit slowly.