Shares of Omaha, NE-based Union Pacific Corporation UNP touched a 52-week high of $101.70 on Nov 23, before declining marginally to close the day at $101.39. The railroad operator has performed impressively in the year so far gaining over 29% year to date. The stock has gained around 13% over the last 30 days.
Recently, the company raised its quarterly dividend to $0.605 per share ($2.42 per share annualized), representing an increase of 10% over the previous payout. The new dividend is payable on Dec 29, to shareholders on record as of Nov 30, 2016. We believe that the dividend hike not only highlights Union Pacific’s commitment to create value for shareholders but also underlines the railroad operator’s healthy financial condition and confidence in its business going forward. Union Pacific’s past records indicate its stable dividend payment history. In fact, the company has been rewarding shareholders through dividend payments over the last 117 years.
Apart from the dividend hike, the board authorized a new buyback plan for up to 120 million common shares by the end of 2020. The new plan will take effect from Jan 1, 2017, replacing the existing scheme which ends on Dec 31, 2016 (one year ahead of schedule). The company returned $3.6 billion to its stockholders in the first nine months of 2016 through these investor-friendly measures. Of the $3.6 billion, approximately $2.2 billion have been returned through share buybacks. Since 2013, the company has returned almost $17.8 billion in cash to stockholders. We are impressed with the company’s efforts to reward investors through buy backs and dividend payouts.
We are also encouraged by the company's prudent cost management. The company, which achieved an operating ratio of 62.1% in the third quarter, is on track to attain its guidance of around 60% by 2019. The company eyes an operating ratio of around 55% for the longer term. Given that the company’s revenues are being impacted by coal-related headwinds, the move to drive growth through cost reduction deserves appreciation. We note that declining revenues due to coal woes are not unique to Union Pacific. Declining coal shipments have hurt its peers like CSX Corporation CSX and Kansas City Southern KSU as well.
We are positive on the prospects of the company’s agricultural products segment. The division performed well in the third quarter on the back of impressive grain shipments. Segmental freight revenues grew 6% year over year to $937 million. Business volumes increased 11% year over year. The strength of the grain market is another positive. The robust U.S. harvest and the strong global demand for U.S. grain are expected to boost exports.
Zacks Rank & A Key pick
Union Pacific currently carries a Zacks Rank # 3 (Hold).
A better-ranked stock in the railroad space is USD Partners LP USDP, which sports a Zacks Rank # 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. The Zacks Consensus Estimate for the current year has surged 46.5% over the last month to $1.26 per share for USD Partners.
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