Wall Street liked what it heard when United Parcel Service (UPS -0.67%) announced its third quarter results last Thursday. UPS stock jumped after the company beat earnings estimates.

But analysts aren’t the only ones who have reason to celebrate after the package delivery giant released its latest quarterly results. UPS also provided good news for income investors who like its 4.7% forward dividend yield.

The biggest concern about UPS’s dividend

If a company can’t easily afford its dividends, income investors won’t have a warm and fuzzy feeling about its stock. This has been the main concern regarding UPS’s dividends.

In 2023, UPS paid $5.37 billion in dividends. However, the company generated free cash flow of $5.25 billion. This is an income imbalance that investors don’t like to see.

The situation seems to be getting worse. During UPS’s third-quarter earnings call, Chief Financial Officer Brian Dykes said the company expects to pay about $5.4 billion in dividends over the full year 2024, subject to the approval of its board of directors. However, he also said that UPS expects to generate free cash flow of approximately $5.1 billion in 2024.

UPS’s dividend payouts as a percentage of projected free cash flow for full year 2024 align with their earnings-based targets. dividend distribution rate by 106%. The growing gap between the amount the company returns to shareholders in dividends and the amount it generates in free cash flow is not a positive trend.

Reasons to feel more confident

So what’s the good news UPS just announced for income investors? Its finances are clearly improving, but not enough to change the full year’s numbers as much as income investors would like.

Importantly, UPS returned to revenue and profit growth in the third quarter. It did so despite what CEO Carol Tomé described during the quarterly earnings call as a “slightly worse macroeconomic environment than expected.”

Dykes noted that U.S. volume growth was “the highest growth rate we’ve seen in over three years.” Domestic volume started to strengthen in the second quarter. However, the quality of revenue was not as attractive due to the influx of lightweight e-commerce packages. Tomé said UPS made adjustments to its pricing and operational plans in the third quarter to improve revenue quality.

She specifically mentioned the company’s addition of the USPS Air Cargo business and the sale of Coyote Logistics. Tomé explained that these measures “eliminated a highly volatile truckload brokerage business and added predictable air freight volume and positive margin.”

Dykes also discussed UPS’s cost management initiatives that reduced the cost per piece transported by 4.1% year-over-year. The company’s operational shutdowns have allowed it to increase the number of parts per labor hour by 8%, which Dykes says translates to an efficiency gain of approximately 11 million hours.

Revenue and profit growth, improved earnings quality, and improved efficiencies should help UPS generate higher free cash flow in the future. Increased costs associated with the company’s contract with the Teamsters union were also heavily blamed early on. UPS’s cost structure, at least in the United States, is expected to improve over the next four years.

Do you want the sweet 16?

UPS increased its dividend for the 15th consecutive year in January 2024. Granted, it was only a $0.01 dividend increase, but an increase is an increase. Can income investors expect the company to go for the “sweet 16” with another dividend increase next year? I think so.

UPS has resumed its share buybacks. Dykes confirmed that the company repurchased $500 million worth of its shares in the third quarter. If push comes to shove, UPS could reduce or suspend buybacks to ensure it can extend the dividend-increasing streak.

More importantly, UPS’s outlook is undoubtedly improving. The company isn’t going to transform into a massive growth machine anytime soon, but it shouldn’t have any trouble funding its dividend. This is good news for income investors.