UPS vs. WAB: Which Dividend-Paying Transportation Stock to Bet on Now?

Both UPS and Wabtec (WAB) increased their dividend payouts this year, but concerns exist regarding the sustainability of UPS's dividend due to its elevated payout ratio and declining free cash flow; WAB's lower payout ratio presents less risk. WAB has outperformed UPS year-to-date, gaining 5.1% while UPS declined in double digits, driven by revenue weakness and declining package volumes, while WAB benefits from new technologies, restructuring, and a growing global rail market. Zacks estimates indicate stronger sales and EPS growth for WAB in 2025 and 2026, with upward revisions, while UPS faces declining sales and EPS estimates with downward revisions.

Analysis

United Parcel Service (UPS) and Wabtec Corporation (WAB) have both increased dividends in the current year, yet fundamental outlooks diverge significantly. UPS faces questions regarding its dividend sustainability due to an elevated payout ratio, with its projected 2025 free cash flow of approximately $5.7 billion barely covering anticipated dividend payments of $5.5 billion, a sharp contrast to its $9 billion free cash flow in 2022 when e-commerce growth peaked. This financial strain is reflected in its stock performance, which has seen a double-digit decline year-to-date, attributed to revenue weakness from geopolitical uncertainties, high inflation impacting consumer sentiment, and declining package volumes. Conversely, Wabtec exhibits a more robust dividend profile with a lower payout ratio, having increased its quarterly dividend by 25% to 25 cents per share. WAB's stock has appreciated 5.1% year-to-date, buoyed by its investment in new technologies, successful restructuring, cost-cutting measures, and a recovering global rail supply market, which UNIFE projects to grow around 3% annually until 2027-29. Analyst sentiment, as indicated by Zacks, further differentiates the two: WAB's 2025 and 2026 sales estimates project year-over-year increases of 4.6% and 4.9% respectively, with EPS estimates trending northward, despite an anticipated 15.3% YoY drop in 2025 EPS before an 11.5% YoY increase in 2026. UPS, however, faces a projected 4.1% YoY sales decrease in 2025 and an 8.3% YoY EPS decrease for the same year, with its estimates trending southward. While WAB trades at a premium forward sales multiple of 3.08x, above its five-year median of 2x, and holds a Zacks Value Score of D, UPS trades at 0.92x, below its 1.54x median, with a Value Score of C. Zacks currently ranks WAB as a #2 (Buy) and UPS as a #5 (Strong Sell), underscoring the contrasting prospects.

Key Decisions for Investors

• Investors should evaluate Wabtec's growth prospects, supported by positive earnings revisions and market tailwinds, against its current premium valuation relative to its historical median.
• Extreme caution is warranted for United Parcel Service, considering the significant concerns over its dividend sustainability stemming from tight free cash flow coverage, alongside declining revenue and earnings estimates and a 'Strong Sell' rating.
• For income-oriented portfolios, a thorough assessment of a company's dividend payout ratio and free cash flow generation capacity is crucial, favoring entities like Wabtec with more conservative payout policies over those like UPS where dividend coverage is thin.