Andrew Bary

UPS management says the company's 5.7% dividend is safe despite tight projected earnings coverage for the payout in 2025.

The company's shares dove 14% Thursday to $114.90, its lowest price since 2020, after the company offered weaker-than-expected financial guidance for 2025. Also rattling investors was news that UPS would reduce package volumes with Amazon.com, its largest customer, by 50%.

But the company expressed support for the dividend, which is now No. 15 in the S&P 500 -- below the 6%-plus yields on such high yielders as Altria, Dow, Pfizer and Verizon Communications.

The company said on its earnings conference call Thursday that it expects to generate $5.7 billion of free cash flow in 2025 and pay out $5.5 billion in dividends and repurchase $1 billion of stock.

On the call, Barclays analyst Brandon Oglenski asked: "How prudent is a $1 billion share repurchase this year with anticipated dividend payments of $5.5 billion." He noted that the company is targeting a 50% dividend payout ratio.

CEO Carol Tome responded: "From a dividend payout perspective, we're targeting 50% of earnings and we're higher than that. It's important to note, however, that it's distorted because of the below the line noncash pension expense. And if you ignore the noncash -- excuse me, noncash pension expense, the payout ratio isn't as high as it appears at its base. So plenty of liquidity to pay the dividend."

UPS now pays a quarterly dividend of $1.36 a share. That payout was lifted by a penny a share in 2024.

The dividend coverage is better based on net income. Projected earnings of $8.66 a share this year, or $7.4 billion, compare with the dividend of $6.52 a share.

Write to Andrew Bary at andrew.bary@barrons.com

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January 30, 2025 17:24 ET (22:24 GMT)

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