Shares of FedEx (FDX -0.84%) hit a new 52-week low on March 21 after the company reported fiscal third-quarter earnings and trimmed its full-year guidance again. Shares of rival package delivery company United Parcel Service (UPS -1.18%) also fell on the news, and then sold off by another 5.1% on March 25 in apparent response to Bank of America analyst Ken Hoexter’s downward revision of his forecast for the logistics giant. Hoexter now expects UPS’ earnings for the current quarter to be 15% below his prior estimate.

With the stock at its lowest level since July 2020, is UPS a buy, or is the dividend stock falling for valid reasons?

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UPS is in for another challenging year

UPS’ sales and operating margins have been falling as the transportation sector has been hit hard by pullbacks in consumer spending and high interest rates. Management is guiding for 2025 revenue to decline by 2.3%, but expects its operating margin to rise by 130 basis points to 8.8% — an increase compared to 2024, but still below pre-pandemic levels.

UPS Revenue (TTM) data by YCharts.

That guidance is fairly weak, but what was even more concerning was this comment from CFO Brian Dykes on the Q4 earnings call: “Our guidance for 2025 does not reflect any significant potential global trade implications due to changes in tariffs.”

On the earnings call, UPS noted that S&P Global forecasts 2.5% GDP growth in 2025, and a 2% increase in real exports and global industrial production. However, if tariffs and trade wars hinder economic growth, these estimates could prove too optimistic, and UPS’ results could be noticeably worse than its already uninspiring projections.

FedEx just cut its fiscal-year adjusted earnings per share (EPS) guidance to a range of $18.00 to $18.60 per share. At the midpoint, that’s down by more than 6% from the guidance it gave just a quarter ago, and down 12.9% from its initial forecast for the year from June. Given the analyst cut that sent UPS stock falling last Tuesday, there appear to be reasons to be concerned that UPS’ results could be even lower than projected.

A slowdown in 2025 could put the company’s medium-term goals in jeopardy. On the latest earnings call, UPS said it expects to return to margin growth in 2026 — forecasting a domestic operating margin of 12% by the fourth quarter of 2026. But if there’s a period of prolonged economic weakness, it may not be able to hit that goal on schedule.

UPS dividend is becoming unaffordable

Since it began distributing regularly scheduled quarterly payouts in 2000, UPS has never cut its dividend. However, there have been years when the company did not raise it. But in 2022, UPS boosted its quarterly dividend from $1.02 per share to $1.52 per share — a massive increase that may have been a mistake in hindsight.

At the time, UPS was firing on all cylinders — growing its revenue, expanding its operating margin, and generating tons of free cash flow (FCF). If UPS had built on that momentum, that 49% higher dividend would have been reasonable. Instead, EPS and FCF fell while UPS continued to make modest annual increases to its payout.

UPS Dividend Per Share (TTM) data by YCharts.

Now, UPS’ dividend payments are absorbing the bulk of its FCF and earnings. When UPS decided on that large dividend raise in 2022, it had a much more manageable payout ratio.

On UPS’ fourth-quarter 2024 earnings call on Jan. 30, management said it expects $5.7 billion in 2025 FCF, which includes its annual pension of $1.4 billion, $3.5 billion in capital expenditures as it invests in improving its network, $1 billion in stock buybacks, and $5.5 billion in dividends. In short, UPS doesn’t think it will generate enough FCF to cover its capital allocation targets, which will put pressure on its balance sheet.

Fortunately, UPS could take on debt, and even if it did, its balance sheet would still be in great shape. UPS paid down debt during the pandemic years when it was booking unusually strong earnings. Its net total long-term debt position is just $15 billion — which is healthy for a company of its size — as evidenced by its strong leverage ratio.

UPS Net Total Long Term Debt (Quarterly) data by YCharts.

UPS can cover a bit of its capital return program by taking on debt in the near term. However, that’s not a sustainable strategy, and it will need to improve its earnings and FCF significantly to reach its target payout ratio of 50%.

President Donald Trump’s tariffs are coming at a terrible time for UPS, as the company was already in recovery mode. A U.S. economic slowdown could delay the company’s turnaround and put further pressure on its balance sheet. If its FCF continues to decline, it could cut its stock buyback program. And if macroeconomic conditions get really bad and stay bad for a while, UPS could have little choice but to consider a dividend cut.

While no investor welcomes a dividend cut, UPS’ yield is high enough that it could trim the payout and still be an excellent source of passive income. For example, if UPS reduced its dividend to $1 per share per quarter — about the same payout it was distributing at the end of 2021 before its massive raise, the stock would still yield 3.6% based on its share price of around $110 at the time of this writing. That’s still a far higher yield than the market average, and higher than many quality dividend stocks.

UPS could still be a good long-term buy

UPS’ near-term prospects look bleak, but its balance sheet is strong, it remains an industry leader, and its dividend could take a cut and still be attractive. UPS is also trading at a dirt-cheap valuation of just 16.3 times earnings. If its earnings fall by, say, 20% in 2025, UPS would still have a P/E of around 20 at the current share price, making it a bargain even assuming an especially negative scenario.

Add it all up, and UPS could be a great buy for patient investors willing to look past the next few years.