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United Parcel Service, Inc. (NYSE:UPS) stock is about to trade ex-dividend in day or two. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, United Parcel Service investors that purchase the stock on or after the 12th of August will not receive the dividend, which will be paid on the 1st of September.
The company's next dividend payment will be US$1.52 per share, on the back of last year when the company paid a total of US$6.08 to shareholders. Looking at the last 12 months of distributions, United Parcel Service has a trailing yield of approximately 3.1% on its current stock price of $196.65. If you buy this business for its dividend, you should have an idea of whether United Parcel Service's dividend is reliable and sustainable. So we need to investigate whether United Parcel Service can afford its dividend, and if the dividend could grow.
Check out our latest analysis for United Parcel Service
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see United Parcel Service paying out a modest 41% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 39% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see United Parcel Service's earnings have been skyrocketing, up 27% per annum for the past five years. United Parcel Service is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.