Union Pacific (UNP) hikes dividend by 10%, but coal exposure continues

Union Pacific’s (NYSE:UNP) dividend was increased by 10%. Its overall yield is above that of the S&P 500 Index, at 2.42%. The firm has paid a dividend since January of 1993.

Union Pacific maintains over 31,000 miles of track and leads the industry in total revenue. Most of the lines are in the western United States.  The firm offers freight transportation services for a multiple source of good including grains, commodities, food & beverage, and other agricultural products. It also provides transport for automotive products, chemicals, petroleum fertilizers, coal, metals, minerals, paper, and lumber. The firm also owns about a quarter of Mexican railroad company Ferromex, which provides approximately 10% of its overall revenue.  The company was founded in 1862 and is headquartered in Omaha, Nebraska.

Union Pacific has maintained a three-year growth rate of dividends of 15.6 percent. Union Pacific currently ranks 1st in yield within the large cap services railroad category.The quarterly dividend for the December payment will be $0.605 versus the prior year rate of $0.55 per share. Union Pacific Corp. is not a member of our Top 100 Dividend Stock List (see below).

The dividend will be paid at the new higher rate on December 29, 2016, to shareholders of record at close of business on November 30, 2016. Union Pacific is currently priced at $99.83. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
1/6/2017 0.33
10/5/2016 0.31
6/29/2016 0.31
3/30/2016 0.31
1/6/2016 0.31
9/30/2015 0.3
6/30/2015 0.3
3/31/2015 0.3
12/30/2014 0.3
10/1/2014 0.29
7/1/2014 0.29
4/2/2014 0.29
12/31/2013 0.29
10/2/2013 0.28
7/2/2013 0.28
4/3/2013 0.28
1/2/2013 0.28
10/3/2012 0.27
7/3/2012 0.27
4/3/2012 0.27
1/4/2012 0.27
10/5/2011 0.26
6/29/2011 0.26
3/30/2011 0.26
1/5/2011 0.26
9/29/2010 0.25
6/30/2010 0.25
3/30/2010 0.25

Quantitative Analysis:

We examine Union Pacific upon our five key criteria, which include; 

Category Value Score
Dividend Yield 2.42%  230
Dividend Growth (3 to 6 year avg) 19.6%  68
Forward P/E 18.15  91
S&P Financial Rating  A  40
Beta  1.05  150
Total Score    579

Additional quantitative information on P/S ratio and historical yield;

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
2.42% 15.6% 23.5% 24.2 4.13 1.67 4.43 1.49% 3.25%

Positives;

  • Union Pacific maintains a credit rating of A. This is investment grade.
  • Union Pacific’s dividend yield is above that of the S&P 500 Index.
  • Union Pacific has paid out a dividend consecutively for the last 23 years.
  • Union Pacific’s forward P/E ratio is just over 18, the average of the market.
  • Union Pacific’s current dividend yield (2.42%) is above its five-year average historical dividend yield of 2.33%.

Negatives;

  • Union Pacific is trading at the top of its ten-year average price/sales (P/S) average.
  • Union Pacific maintains a beta of 1.05, higher than the average company.

Latest Earnings & Overall Analysis:

Union Pacific released its last earnings report on October 20th. Its Q3 profit dropped by  13% as the firm continues to struggle with freight volume. Total carload revenue dropped by 6% in the railroad continues to struggle with declining demand for its freight-hauling services. Freight volumes, as measured by total revenue carloads, slumped 6% compared to the prior year period.

The stock of Union Pacific tumbled by 7% that day, the most since 2009 as the largest publicly traded railroad signaled that pricing power has eroded with a decline in freight demand. Union Pacific reported that Q3 earnings per share were $1.36 a share. That fell far short of the $1.40 average analyst estimate.  Revenue also cascaded down, dropping 7% to $5.17 billion.  The firm guided to low single digit volume declines for the fourth quarter and 6–8 percent drop in revenue for the full year.

Coal was a continual problem for UNP. Coal revenue dropped 19% in the quarter to $728 million.  Demand for coal has been hurt for the last several years as utility firms move on to more cost efficient and cheaper natural gas. Costs were also up, rising just over 1%.  One bright spot in the report was from the grains side.  Carloads of grains were up 27% in Q3. This assisted the firm’s agricultural products division to an overall 6% rise in revenue. Union Pacific exited the third quarter with cash and cash equivalents of $1,909 million.

One key element to its future success is the outlook for coal.  Although coal will continue down the path of obscurity as natural gas firms take market share, United Pacific does have large presence within the Powder River Basin. And coal produces over $2 billion of revenue firm the railroad firm this year. One benefit is that the coal from the Power River Basin is much cheaper to deliver than almost all its competitors, especially the coal from the Appalachian area.

Overall, UNP is the leading railroad company in its industry. But its reliance on coal and poor performance in both earnings and revenue in Q3 make the firm a more risky bet today than other companies within the industrial sector. The firm trades at a forward price/earnings ratio of over 18. Additionally, its price/sales (P/S) ratio is well above 4, much higher than its ten-year low of 1.67. Although its dividend growth rate is impressive and well above average, its yield at 2.42% is also below its historical high of 3.25%.

Based on its high P/E, P/S, moderate yield, and higher than market beta, Union Pacific does not qualify as a member of our  Top 100 Dividend Stocks

Union Pacific Corp. Dividend Yield Chart (Click to enlarge)

unp2

Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s