UPS (NYSE: UPS) has delivered dividends consistently for decades. Except for 2009, when it kept the dividend steady, UPS has lifted the payout to shareholders every year since 1999 – and that includes a 5% increase in February.

But can the package delivery company continue to pay the current quarterly dividend of $1.01 per share?

The numbers say it can’t.

Free cash flow has been inconsistent over the past few years, turning negative in 2017 and dropping precipitously last year.

Both one- and three-year cash flow growth are negative. This year’s projected free cash flow growth is barely above 2016’s.

However, business will certainly be impacted by the coronavirus. As the economy grinds to a halt, fewer packages are being sent.

Additionally, airlines are getting into the cargo business in order to make up for lost revenue.

I don’t expect them to have a large impact, but every little bit hurts UPS, especially when free cash flow was already expected to be close to 2016’s total.

Furthermore, the payout ratio is too high for me to be comfortable.

Last year, UPS paid out $3.2 billion in dividends while generating $2.3 billion in free cash flow. So it didn’t even generate enough cash to pay the dividend.

In 2020, the company is expected to pay $3.3 billion in dividends on $3.7 billion in free cash flow for a too-high payout ratio of 89%.

Typically, I like to see a payout ratio of 75% or lower. That gives us a buffer if things get tough, like they probably will this year. I wouldn’t be surprised if free cash flow dips below the amount paid to shareholders due to the economic slowdown.

UPS has a terrific track record of paying dividends. However, the numbers just don’t work. If they get any worse than currently expected, the dividend could be in jeopardy.

Dividend Safety Rating: F

Good investing,

— Marc Lichtenfeld

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