United Parcel Service (NYSE:UPS) Will Pay A Larger Dividend Than Last Year At $1.63

United Parcel Service, Inc. (NYSE:UPS) has announced that it will be increasing its dividend from last year's comparable payment on the 8th of March to $1.63. This will take the annual payment to 4.7% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for United Parcel Service

United Parcel Service's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, United Parcel Service was paying out quite a large proportion of both earnings and cash flow, with the dividend being 109% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Over the next year, EPS is forecast to expand by 33.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 67%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

United Parcel Service Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2014, the annual payment back then was $2.48, compared to the most recent full-year payment of $6.52. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

The Dividend Has Growth Potential

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. United Parcel Service has seen EPS rising for the last five years, at 7.3% per annum. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think United Parcel Service's payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 3 warning signs for United Parcel Service that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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