UNP Entering Bargain Territory…

Union Pacific Corp. is a leading transportation company in the U.S. Union Pacific Railroad, its principal operating company, is North America’s premier railroad franchise, covering 23 states across the country. Union Pacific is one of the oldest and largest transportation companies in the U.S. It operates from all major West Coast and Gulf Coast ports to eastern gateways and connects with Canada’s rail systems. It is the only railroad serving all six major Mexico. In 2018, premium traffic represented 49% of the company’s volume, followed by manifest and bulk traffic at 26% and 25%, respectively. Union Pacific is the largest automotive carrier west of the Mississippi River. Its rail equipment includes owned and leased locomotives and rail cars, heavy maintenance equipment and machinery, and other equipment and tools.

Union Pacific serves roughly 10,000 customers in many of the fastest-growing U.S. population centres. It provides the critical infrastructure in supporting America’s transportation needs through its excellent network, port linkages, and strategic terminal locations. Union Pacific’s diversified portfolio of business can be classified into Premium (49% of 2019 volume), Industrial (29%) and Bulk (25%) business groups.

The company operates large route miles of 32,200 and owns 8,300 locomotives.

Investment Data

Revenue Growth and Market Exposure

Union Pacific Corp. is known for providing North America’s safest, most reliable and most efficient supply chain solutions. The company is one of the nation’s largest carriers of coal and chemicals, food and forest products, automobiles and agricultural products. It moves everyday goods that American families and businesses use. Its railroad directly serves many of the fastest growing cities in the U.S. and provides a critical link in the global supply chain connecting key West Coast and Gulf Coast ports to Canada, Mexico and the country’s eastern gateways. The railroad’s extensive franchise has access to more than 40 vehicle distribution centres and directly serves five vehicle assembly plants.

Union Pacific’s premium business includes the transportation of finished vehicles, auto parts, intermodal containers, and trailers. Its Manifest traffic includes individual carload or less-than-trainload business, involving commodities such as lumber, steel, paper, frac sand, food, and chemicals and its bulk traffic primarily consists of coal, grain, soda ash, rock, crude oil, and frac sand. UP’s unique network can directly access all six U.S./ Mexico rail gateways, providing faster handling of increasing cross-border automotive traffic.

Union Pacific has invested approximately $34 billion in its network and transportation infrastructure over the last decade. Its unique franchise, coupled with the ownership of more than 80% of the rail-owned refrigerated boxcar fleet in North America and multiple refrigerated and cold storage distribution assets, creates a strong competitive advantage for the company in the shipment of perishables. The company’s food network also reaches coast to coast. Union Pacific is making good progress on precision scheduled railroading (PSR) with improving operational metrics in the latest quarter, as well.

Dividends

Union Pacific is a Dividend Achiever and has returned more than $50 billion to its shareholders in the last ten years. The company has paid uninterrupted dividends since 1998 and increased them every year since 2007. It sports a decent dividend yield of 2.4% and has a payout ratio of 46%. Its last annual dividend hike was more than 26%. The company has a solid history of dividend payments with a dividend growth rate of 20% CAGR over the last decade. Union Pacific’s EPS has also grown at a rate of 13%+ CAGR during the same time.

Railroads are much more fuel-efficient and are preferred to transportation by trucks, as they reduce the impact on the environment and public infrastructure. However, the business is highly capital intensive and requires significant annual capital investments for replacement, improvement, and expansion of the rail network. Union Pacific is expecting its capital plan to be ~$3 billion in 2020. It is making strategic capital investments towards improving train length, safe and resilient infrastructure, equipment acquisitions, and enhancing capacity and commercial facilities.

The company’s resilience can be gauged by the fact that it has successfully weathered the economic slowdown. It should, therefore, keep increasing its dividend comfortably in the high single-digit range going forward. Union Pacific has a dividend target payout ratio of 40%-45% of earnings and a $20 billion share repurchase program.

Competition

Union Pacific faces competition from other railroads, motor carriers, ship and barge operators, and pipelines. Its main railroad competitor is Burlington Northern Santa Fe LLC. With more than 150 years of service, Union Pacific has built a strong and unique franchise with strategic terminal locations, broad port coverage and balanced network. The company’s extensive franchise and ownership of refrigerated boxcar fleet in North America significantly add to its competitive advantages.

Bottom Line

Union Pacific’s extensive network and diverse access to ports, intermodal terminals, automotive distribution centres, border crossings provide it access to virtually any market in North America. UNP has the ability to serve Canadian and Mexican markets through interchange agreements with other railroads. Better trade conditions on the back of easing trade tensions in 2020 should support its future dividend growth streak once the COVID-19 challenges are behind us.

In the meantime, the drop in prices can be seen as an opportunity for a rare juicy dividend.