Can Union Pacific Stay on Track?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The opening bell welcomes the morning of January 13th, 1978, and with it numerous companies opening their first trading day. One of these companies is a railroad operator known as Union Pacific Corporation (NYSE: UNP). This company operates in the western part of the United States and carries all types of goods to and from cities and towns keeping them connected in a unique way. The company played a vital role in the construction of the Central Pacific Railroad. As the railroad company completes its first day of trading, management celebrates a relatively high starting point at $5.81.
Now nearly 35 years later Union Pacific is expected to open at $118.15, supplying initial investors with 1,932.69% returns, turning a merger $1,000 into a gigantic $19,326.90. Currently, Union Pacific operates North America’s premier railroad franchise, covering 23 states in the western two-thirds of the US. Union Pacific’s railroads cover 31,900 miles or 51,338 kilometers. The company has been in business ever since 1862, making Union Pacific 150 years old. Union Pacific is one of the oldest public businesses in the world and has more than a lifetime of experience. Below is a chart of Union Pacific’s domestic wingspan. So has Union Pacific grown so old that it cannot continue to grow and offer solid returns to its investors?
Chartable Growth
Union Pacific reported $5.53 earnings per share in 2010. In 2011, Union Pacific stated that it had earned $6.72 per share. This growth displayed by Union Pacific represented a 21.51% year over year growth rate. This displays abnormally high growth from what is normally expected from a railroad company, but the acceleration in spending in the United States from 2010 to 2011 helped fuel Union Pacific’s growth. In 2012, earnings per share are expected to grow to $8.15, displaying 21.27% year over year growth. Based on the average consensus, in 2013 earnings per share are anticipated to rise to $9.29. This expresses Union’s slowing growth as the train pulls into the train station. Union Pacific’s year over year earnings per share growth rate from 2012 to 2013 is expected to be 13.98%. Union Pacific’s growth is not going to be anything special, but will sustain the company and allow it to flourish. Just take a look at the company's sales, operating profit, net income, net margin, and operating margin over the coming years.
With Age Comes Sustainability, and With Sustainability Comes Dividends
Union Pacific recently celebrated its 150th birthday. Not a lot of companies can say they have been in business for one hundred and fifty years. Union Pacific has steadied the ship in even the roughest of waves, and has displayed immense sustainability over the decades. Since Union Pacific Corp. can no longer offer the explosive growth of yesteryear, it now rewards investors with a dividend that is supported by current growth. Union Pacific currently pays out a quarterly dividend of $0.60, or an annual dividend of $2.40. At the current price of $118.15, Union’s dividend yields 2.03%, north of the 10 year treasury rate of 1.52%. Union Pacific’s growth will allow the company to grow its dividend to a more significant level. By 2013, the average consensus believes Union Pacific’s annual dividend will reach $2.64. This would show 10.00% year over year dividend growth. In 2014, the annual dividend of Union Pacific Corp. is expected to reach $2.77. This displays year over year dividend growth of 4.92%. All in all, Union Pacific has been around for a long time, through good times and bad, and will use its growth to provide a secure channel of income for its investors. Just look at Union Pacific’s earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend, otherwise known as the payout ratio) over the upcoming years.
Is Union Pacific the King of the Rails?
Compared to its competitors such as, Kansas City Southern (NYSE: KSU), CSX Corporation (NYSE: CSX), and Norfolk Southern Corp. (NYSE: NSC), Union Pacific stacks up moderately well.
|
UNP |
KSU |
CSX |
NSC |
|
|
1 Year EPS Growth |
18.40% |
83.30% |
16.60% |
28.10 % |
|
3 Year EPS Growth |
18.55% |
43.26% |
19.05% |
14.88% |
|
5 Year EPS Growth |
15.80% |
13.22% |
11.57% |
6.62% |
|
1 Year Dividend Growth |
2.40% |
0.78% |
0.56% |
1.88% |
|
3 Year Dividend Growth |
23.71% |
0.00% |
26.19% |
8.74% |
|
5 Year Dividend Growth |
25.09% |
0.00% |
27.37% |
15.14% |
|
Current Dividend Yield |
2.03% |
1.11% |
2.47% |
2.55% |
|
Price to Earnings Ratio |
16.35 |
22.59 |
12.96 |
12.73 |
|
Price to Earnings to Growth Ratio |
0.85 |
1.02 |
0.96 |
1.34 |
|
Market Capitalization |
56.27 B |
7.71 B |
23.55 B |
24.01 B |
According to DailyFinance.com
Union Pacific Corporation is not the fastest growing company in the sector, but does have one of the highest dividend growth rates in the sector, showing the importance management is putting on growing the company’s dividend. Additionally, Union Pacific is the largest company in the sector, giving Union Pacific a firmer grasp on the railroad market than any other company. Furthermore, Union Pacific’s huge market capitalization and diversified portfolio will help Union Pacific weather extremely difficult markets.
The Foolish Bottom Line
Union Pacific has grown to cover nearly the entire United States, and has handed its investors unbelievable returns over the past 35 years. These types of returns will not be seen over the upcoming 35 years. Union Pacific has already completed much of its growth, but it will continue to offer decent returns to its investors as the focus shifts to growing the dividend, proving Union Pacific will stay on track.
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