Rewards are rewards in terms of investment, but so are risks. It's not difficult to see potential rewards from investors with high-yield stocks Ford (NYSE: F) and ups (NYSE:UPS). Investors hope to make profits from dividend yields of 7.1% and 6.5% respectively, while waiting for the two companies to reverse their operating performance. Still, what about the risk of the two companies cutting dividends? This is what company is best positioned when considering the reward and risk.
The following table explains the problem very well. UPS aims to pay about 50% of its dividend earnings, and Ford aims to have free cash flow (FCF) of 40% to 50%. It is clear that the initial guidance given by both companies in late January/early February does not mean the initial guidance for potential dividends in 2025.
UPS plans to pay a dividend of $5.5 billion in 2025. Ford's situation is even more complicated as it regularly pays a dividend of $0.15 per quarter and pays a supplemental dividend of $0.15 in the fourth quarter of 2024. The total you are below is the total for 2024. 96%.
Fast forward to early April and “Liberation Day” tariffs, transaction and cost environments have changed so dramatically that the two companies refused to reiterate or update their guidance. Additionally, UPS management talked about the situation in the case of average daily volume (ADV) in February and March, and said ADV fell by 9% in the second quarter.
Ford suspended guidance due to potential supply chain challenges, tariff implementation changes and other potential trade restrictions. Furthermore, Ford's outlook is as challenging as UPS due to tariff uncertainty and consumer confidence decline.
Most importantly, deteriorating trading conditions could force both companies to cut dividends in 2025, and investors need to be aware of this.
| Free cash flow and cash dividends | Ford | ups |
|---|---|---|
| Initial year-round guidance | $3.5 billion to $4.5 billion | $5.7 billion |
| Cash dividend is paid in 2024 | $3.1 billion | $5.4 billion* |
| - "Liberation Day" annual guidance | Guidance has been suspended | No guidance updates |
Data source: Company Demo. * Management's cash dividend guide for 2025 is $5.5 billion.
Given the risk that both companies can cut dividends, the key question is: What stocks will you hold for the long term even if you cut your dividends? I think the answer is UPS, and the key factor is: the trajectory of the basic strategic development of UPS is much better than that of Ford.
Ford's main strategic purpose must be to make a long-term transition from internal combustion engine (ICE) vehicles (EVS), and there seems to be a slow progress in this regard. The company reported three segments, with Ford Blue (Ice and Hybrid Vehicles and Parts) generating $5.27 billion in revenue (EBIT) in 2024 before interest and taxes, while Ford Pro (Ford and Lincoln sold to commercial, government and rental customers) making $9 billion. However, Ford Model E (EV and digital services) lost $5.1 billion in 2024. Despite improvements in the first quarter (losing only $849 million), Ford is far from proving that it is expected to achieve its goals.
But, this is another story from UPS. In fact, there is a strong case where UPS will outperform if it cuts its dividend. The subsequent reduction in resetting investor expectations will guide investors to pay attention to the company's ongoing shift in its revenue portfolio. It is moving away from low functional delivery of business-to-consumer (B2C) Amazon.comtowards targeted high profit delivery in the final markets such as small and medium-sized enterprises (SMBs) and healthcare.
Meanwhile, management continues to invest in productivity-enhancing technologies (automation, smart facilities) that will enable it to reduce costs by merging facilities. Pliers movement that focuses on higher edge delivery while increasing its productivity should lead to an increase in return on assets for UPS.
Despite some recent challenges associated with the current tariff environment, SMB's potential growth is impressive. It increased from 27% of U.S. sales in 2021 to 28.9% in 2024, while management aims to reach 40% over time. In healthcare, this is an even more impressive story in which ongoing investments, including the upcoming $1.6 billion acquisition of a cold chain transport company in the healthcare space, is expected to increase organic growth from $10 billion in 2023 to $20 billion in 2026.
Both companies can cut dividends, but a compelling case for UPS to recover from it is better than Ford. The car company needs to invade the EV market dominated by the EV market Teslathis is not easy in a challenging trading environment, especially when Tesla is about to launch Robotaxis. By contrast, even if the recent headwind is very important, UPS is on a good strategic track.
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John Mackey, former CEO of Amazon's subsidiary Whole Foods Market, is a member of the board of directors of Motley Fool. Lee Samaha has no position in any of the stocks mentioned. Motley fool has a place and recommends Amazon and Tesla. Motley Fool recommends joint parcel services. Motley Fool has a disclosure policy.
Better Dividend Stocks: UPS & Ford Originally published by Motley Fool