UNITED PARCEL SERVICE-CL B (NYSE:UPS) – A High-Yield Dividend Stock with Strong Profitability and Growth Potential

Dividend investors frequently look for a balance between yield, sustainability, and financial health when choosing stocks. One way to find these opportunities is by using a dividend-focused stock screener that selects companies with strong dividend ratings, good profitability, and reasonable financial health. UNITED PARCEL SERVICE-CL B (NYSE:UPS) appears as a candidate from this screen, providing a good mix of income potential and stability.

Why UPS Appeals to Dividend Investors

1. Competitive Dividend Yield and Growth

UPS currently has a dividend yield of 6.40%, much higher than both the industry average (3.71%) and the S&P 500 (2.32%). This makes it an attractive option for investors focused on income. Beyond the current yield, UPS has shown a strong dedication to increasing its dividend, with an annualized growth rate of 11.18% over the past five years. The company has also maintained a consistent dividend payment record for at least ten years, highlighting its reliability as a dividend payer.

However, investors should be aware that UPS’s payout ratio (92.20%) is relatively high, meaning nearly all of its net income is paid out as dividends. While this raises some questions about sustainability, the company’s strong cash flow and profitability help reduce this risk.

2. Solid Profitability Backs Dividend Payments

A critical factor in assessing dividend sustainability is a company’s ability to generate steady profits. UPS earns an 8 out of 10 in ChartMill’s Profitability Rating, reflecting its strong financial performance:

• High Margins: UPS has a gross margin of 80.82%, better than all its industry peers. Its operating margin (9.48%) and profit margin (6.44%) also rank among the best in the air freight and logistics sector.
• Good Returns: The company’s return on equity (37.39%) and return on invested capital (12.73%) are well above industry averages, showing efficient use of capital.

These metrics indicate that UPS has the earnings strength to maintain its dividend, even with a high payout ratio.

3. Financial Health: A Balanced View

While UPS’s Health Rating (5/10) is moderate, the company still has several strengths:

• Solvency: UPS has a Debt-to-FCF ratio of 3.98, meaning it could pay off its debt in under four years using its free cash flow—a sign of manageable debt. Its Altman-Z score (3.15) also suggests low near-term bankruptcy risk.
• Liquidity Notes: The company’s current and quick ratios (both 1.09) are below industry averages, indicating tighter working capital. However, its strong cash flow helps balance this weakness.

For dividend investors, the main point is that while UPS isn’t the most conservatively financed company in its sector, its profitability and cash flow provide a cushion against financial pressure.

4. Valuation: A Reasonably Priced Stock

UPS trades at a P/E ratio of 13.04, below both the industry average (18.60) and the S&P 500 (27.93). Its forward P/E of 12.81 further suggests the stock is fairly priced relative to future earnings. This undervaluation could offer downside protection while investors earn the dividend.

Final Thoughts

UPS fits well in a dividend investing strategy by offering:

• A high and growing yield supported by strong profitability.
• A long history of dependable payouts.
• A valuation that allows for potential price growth.

That said, investors should watch the high payout ratio and moderate liquidity metrics to ensure the dividend remains sustainable over time.

For those interested in finding more high-quality dividend stocks, the Best Dividend Stocks screener provides additional screened options.

Disclaimer: This article is not investment advice. Always conduct your own research or consult a financial advisor before making investment decisions.