Is UPS High Dividend Safe?

Although full-year profits dipped, Q4 2024 revenue inched up 1.5% year-on-year to $25.3 billion, and adjusted operating profit jumped 11.2%​. UPS managed to grow adjusted operating margin and deliver 11.3% higher adjusted EPS in Q4.

The U.S. segment returned to growth with a 2.2% top line rise in Q4 on the back of a 2.4% increase in revenue per piece and growth in air shipments​.

International operations stood on among the bulls thanks to revenues rising by 6.9% in Q4 with an 8.8% jump in volume, yielding a strong 21.6% adjusted operating margin​.

However, the Supply Chain Solutions unit saw a revenue decline after UPS’s divestiture of its freight brokerage Coyote Logistics, though underlying forwarding activity grew​.

Overall, UPS’s 2024 results depict a company balancing volume normalization with cost pressures, including a new union labor contract that lifted wage expenses.

While profitability in 2024 was down from the prior year, the late-year momentum indicates UPS’s cost cuts and pricing actions are beginning to bear fruit, positioning it for a gradual recovery in margins. So what’s up with the share price?

UPS Will Lower Its Volume of Amazon Packages

UPS says it will dramatically cut the volume of packages it delivers for Amazon. That might sound like the worst idea, considering that UPS is struggling to meet its earnings goals. You’re not alone in thinking that. A lot of investors were surprised when UPS announced that it plans to reduce its Amazon volume by 50% before the end of 2026.

Although surprising, this could be a smart move on UPS’s part. Yes, UPS delivers millions of packages for Amazon, but the company has a contract with extremely thin margins. UPS doesn’t earn much money when it delivers a package for Amazon, so it is starting to step away from the world’s largest e-commerce company.

How will reducing Amazon delivery volumes affect UPS’s bottom line? Again, UPS is taking a bit of a gamble. It’s willing to risk some revenue to improve its margins, a strategy that could work in UPS’s favor depending on how investors respond.

This could also be a preemptive move from UPS. When UPS and Amazon joined forces, Amazon needed third-party companies to complete deliveries. When you ordered something from Amazon, a company like UPS, FedEx, or USPS would usually get the product to your door.

Amazon still uses those relationships, but the number of Amazon trucks on the road keeps growing. The online retailer expects to add 100,000 electric vehicles to its fleet by 2030. UPS might interpret this as a sign that Amazon wants to consolidate more of its business operations behind the Amazon brand. By starting to walk away, UPS is protecting its investors from a much bigger shock in a few years.

Because UPS has chosen to let its contract with USPS expire, it will affect some businesses and consumers using the company’s SurePost service. This change won’t hurt UPS’s earnings as much as leaving Amazon, but it will take a small bite out of its revenues.

Again, UPS likely made this decision because its contract had such small margins. It will continue offering SurePost to business clients, but it won’t coordinate with USPS. Realistically, this will probably hurt USPS much more than it hurts UPS. It might even encourage more businesses to make UPS their sole delivery provider.

Is UPS a Buy?

With a $132 per share price target among 31 analysts, UPS is a buy with 12% upside to fair value. It’s got to be said that the range is extremely wide from $89 per share to $179 per share suggesting some high uncertainty in the actual fair value of the firm.

A discounted cash flow analysis aligns very closely with the consensus among analysts, and suggests $126 per share is the fair value for the firm.

Is The 5.6% Dividend Safe Or Ready to Be Cut?

UPS has had an excellent streak with its dividend payout either staying fairly steady or increasing all the way back some three decades and more now.

Early last year, the Board of Directors voted for the 15th consecutive annual increase that resulted in a quarterly payout to $1.63 per share​.

By Q1 2025, the dividend inched higher to $1.64 per quarter​, a slowdown following a period of more aggressive hikes a few years ago when UPS’s profits were mushrooming.

To put things in perspective, UPS really hiked its payout in 2022 by 50% when the e-commerce boom was in full fledged breakout mode.

These days, the UPS dividend yield sits around 5.67%, markedly higher than rival FedEx’s 2.1% yield​. Even Treasury bills are a close match to the payout now but that alone tells investors that UPS share price is pretty much down in the dumps.

The annual dividend obligation of $5.5 billion planned for 2025​ consumed a high portion of 2024’s free cash flow that came in at $6.3B​. In 2024, the payout ratio hovered in the 80–85% range of adjusted earnings, an unusually high level.

Dividend sustainability is a key watch point because management insists the dividend is essentially untouchable and have described it as a “hallmark of the company’s financial strength”​.

Analysts largely agree UPS can maintain the dividend given its operating cash flow, but expect minimal raises in the near term to rebuild earnings coverage.

So, is UPS dividend sustainable? Barring a severe downturn, the dividend appears safe and a cut unlikely. Better yet, UPS has commited to shareholder returns by authorizing $1B of share buybacks for 2025​.

For investors, UPS offers a pretty attractive combination of blue-chip reliability and high yield, though future dividend growth will likely track behind earnings growth until the payout ratio normalizes.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.