Wondering If UPS' 6.7%-Yielding Dividend Is Sustainable? Here's What You Need to Know.

I've read several articles recently suggesting that United Parcel Service (NYSE: UPS) should cut its dividend. The reasoning is that the world's largest package delivery company could create more value for shareholders if it did.

While the idea of a dividend cut might be appealing to some, I suspect many income investors won't like it one bit. If you're in that group, you might be wondering if UPS' 6.7%-yielding dividend is sustainable. Here's what you need to know.

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Reasons for concern

If UPS already had ample financial flexibility to fund its dividend and invest in growth, you probably wouldn't hear anyone talk about a potential dividend cut. The reality, though, is that there are some reasons for concern.

Let's start with the dividend payout ratio. The closer this ratio is to 100%, the more precarious a company's dividend is. UPS' dividend payout ratio is a little over 95%.

However, sometimes dividend payout ratios can be misleading. Why? They're based on earnings, which don't always give the best picture of a company's ability to fund its dividend program. Earnings can be weighed down by non-cash charges such as amortization and depreciation.

A better metric to look at is free cash flow. In the first quarter of 2025, UPS generated free cash flow of nearly $1.5 billion. It paid $1.35 billion in dividends during the quarter. The company's payout ratio based on free cash flow is 90%. That gives UPS a little more breathing room to pay its dividend, but it's still not great.

I also noticed that UPS Carol Tomé didn't talk about the dividend in the Q1 earnings call. But in the 2024 Q4 call, she said that the company had "plenty of liquidity to pay the dividend." It could be reading something between the lines that isn't there, but the absence of any discussion about management's commitment to the dividend could trigger a not-so-warm-and-fuzzy feeling for some income investors.

Encouraging news

Want some encouraging news for income investors? I have some for you.

UPS' decision to slash its Amazon shipping volume in half by mid-2026 will help in several ways. The company plans to reduce total operational hours by roughly 25 million hours. It's cutting around 20,000 positions this year. UPS is closing 73 buildings by the end of June, with a total of 164 closures in the first phase of its network reconfiguration.

Granted, reducing shipments for Amazon will also result in lower revenue. However, the reason behind the move was that this business isn't very profitable. UPS expects its operating margin and profitability to increase as a result of the Amazon glide-down.

In addition, the package delivery giant has embarked on a major efficiency improvement project. UPS is using robots to automate label application, sorting, unloading and loading trailers, and more. By the end of 2025, the company expects to have 400 facilities partially or fully automated. With both the Amazon reductions and the efficiency improvements, UPS thinks it's on track to cut costs by $3.5 billion in 2025. This should boost free cash flow to some extent.

The Trump administration's tariffs might not hurt UPS as much as anticipated, either. The U.S. International Court of Trade and the U.S. District Court for the District of Columbia ruled last week that the president can't unilaterally impose some tariffs based on the International Economic Emergency Powers Act (IEEPA). Although the tariffs remain in place while the administration appeals the decisions, these court rulings could be upheld.

Is UPS' dividend sustainable?

So, is UPS' juicy dividend sustainable? I think so.

That doesn't mean the company's board of directors won't ultimately decide to cut the dividend. However, at least for now, they don't necessarily have to make that call. And if the Amazon glide-down and efficient improvement initiatives pay off as much as expected, maybe UPS won't have to seriously consider a dividend cut for a long time to come, if ever.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Keith Speights has positions in Amazon and United Parcel Service. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.