United Parcel Service's Earnings Declined in Q3. Is the Dividend Still Safe?

Logistics giant United Parcel Service (NYSE:UPS) pays an attractive dividend that yields around 6.1%. That's far higher than the S&P 500 average of just 1.1% right now. Many investors, however, may be worried that its payout may not be sustainable given the current economic challenges and the company's underwhelming financials.

Last week, UPS released its latest earnings numbers for the third quarter, and its bottom line declined on a year-over-year basis. Does this mean its dividend isn't safe?

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The company's revenue increased, but transformation costs weighed on its profits

For the three-month period ending Sept. 30, UPS reported consolidated revenue of $22.9 billion, which rose by nearly 7% year over year. But of key concern for investors is the bottom line, where the shipping company's diluted earnings per share (EPS) came in at $1.37, down from $1.55 in the prior-year period. UPS did, however, incur $130 million in after-tax costs related to its transformation strategy as well as $182 million in goodwill impairment. On an adjusted basis, its EPS was $1.69.

Currently, the company's quarterly dividend is $1.64, which suggests that the payout may be barely sustainable given its most recent numbers.

Another way to evaluate the dividend is by looking at free cash flow, which is how much money the company is bringing in after factoring in its capital expenditures. At $4.2 billion over the past nine months, that averages out to $1.4 billion on a quarterly basis -- right around how much it pays in dividends.

Once again, there's a buffer there, but a fairly slim one.

UPS' dividend remains manageable for now, but I wouldn't rely on it

A dividend cut doesn't look to be around the corner for UPS, but given the challenging economic conditions due to rising oil prices and higher inflation, it's possible that UPS' numbers deteriorate in future quarters. Cutting the dividend may be a necessary move in the near term to improve its bottom line, and that's why I wouldn't rely on its payout. When a company is in the midst of a transition and incurring charges related to it, the dividend it pays can be a sensitive area for management. While it doesn't want to disrupt it, the recurring payout can prove to be burdensome.

This year, UPS stock has risen by 9%, but I wouldn't rush to buy it given that its numbers don't look all that great, at a time when economic conditions may not be getting better down the road. While it can still be a good long-term investment, I think there are better dividend stocks available for investors.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends United Parcel Service. The Motley Fool has a disclosure policy.