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Following the trend of dividend hikes, Union Pacific Corp. (UNP - Analyst Report) will increase its shareholders’ wealth by raising quarterly dividend. The board of directors of this largest class 1 freight railroad operator in the U.S. has voted to increase the company’s quarterly dividend rate by 14.5% to 79 cents per share from the existing 69 cents. The new dividend will be paid on Oct 1, 2013 to stockholders of record as of Aug 30.

The dividend hike reflects the company’s strong free cash flow and confidence in generating solid reinvestable returns for its shareholders. The regular dividend of 79 cents equates into an annual dividend of $3.16, which translates into a dividend yield of 1.94% based on the current market price.   

This is the second dividend hike by Union Pacific in the last one year after the railroad operator raised its quarterly dividend by 15% in Nov 2012 from 60 to 69 cents. The company has paid dividends on its common stock for 114 consecutive years. The recent hike dividend reflects an almost 150% increase in the last 3 years.

Investor confidence in Union Pacific was also solidified with its recent earnings beat. For the second quarter of 2013, the company reported adjusted earnings of $2.37, surpassing the Zacks Consensus Estimate of $2.35 and year-ago earnings of $2.10.

Better-than-expected earnings were aided by higher pricing and an improvement in operating ratio. However, quarterly revenue of 5,470 missed the Zacks Consensus Estimate of 5,497 million.

Most of Union Pacific’s segments reported steady performance in the second quarter of 2013. The company exited the quarter with free cash flow of 833 million reporting 161% annualized growth. We believe such strong segmental and cash flow growth has allowed Union Pacific to raise its dividend, which in turn will help the company to attain its target pay-out ratio of 30–35%.     

Union Pacific’s rival CSX Corp. (CSX - Analyst Report) recently hiked its dividend by 7.1% from 14 cents to 15 cents per share, while Norfolk Southern Corp. (NSC - Analyst Report) raised its dividend by 4% from 50 cents to 52 cents per share.

Union Pacific currently carries a Zacks Rank #3 (Hold). Other companies within the sector that is worth considering is Amerco Inc. (UHAL), which carries a Zacks Rank #2 (Buy).

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