Back to top

Image: Bigstock

3 Blue-Chip Transportation Stocks on Investors' Watch List

Read MoreHide Full Article

It is no longer news that the year 2022 has seen extreme market volatility so far. To tame the sky-high inflation in the United States, the Fed adopted a hawkish stance. Per the latest available data, the Consumer Price Index (CPI) inflation for September 2022 was up 8.2% year over year. As a result of the higher-than-expected reading, the Fed, which already raised its core interest rate 3% year to date, is likely to continue its interest-raising policy in its future meetings this year.  Higher interest rates result in the cost of borrowing moving north, thus escalating the chances of an economic slowdown.

This gloomy scenario and the uncertain path ahead are well reflected in the 19%, 34.81% and 25.4% year-to-date declines in the Dow Jones Industrial Average, Nasdaq composite and S&P 500 indexes, respectively. Despite the current turmoil, shunning equities is never advisable for investors. So what’s the way forward?

One way forward could be keeping tabs on blue-chip stocks, as they are financially sound and resilient to market swings. We apply this logic to the widely-diversified Zacks Transportation sector, the focus of this write-up. Industry heavyweights like United Parcel Service (UPS - Free Report) , Union Pacific Corporation (UNP - Free Report) and Norfolk Southern Corporation (NSC - Free Report) clearly fit the bill and should be on an investor’s watch list.

Tailwinds in the Transportation Sector

Even though headwinds like the above-mentioned inflation-induced market volatility, supply-chain woes and high-fuel costs dented the prospects of the Transportation sector, inducing its 24.9% year-to-date decline, it is heartening to note that sector participants are surrounded by some positives.

Zacks Investment Research
Image Source: Zacks Investment Research

Owing to the uptick in economic activities, freight demand continues to be strong despite minor hiccups. This is supporting growth for the transportation players like railroad operators. The Cass Freight shipments Index improved 4.8% year over year in September. The overall improving trend is evident from the fact that the measure has improved year over year in five (February, March, July, August and September) of the nine months reported so far this year.

With people resuming their daily activities, following the relaxation of COVID-related restrictions, air-travel demand rebounded very strongly. This is good news for the airline companies in the sector. Even though economies are reopening, consumers’ urge for online shopping refuses to relent. This continued strength in e-commerce demand bodes well for companies like UPS.

Transportation Stocks to Watch

Given the above tailwinds surrounding the sector, investors should keep tabs on stocks from this key field. To aid their search, we shortlisted three heavyweight stocks, which are financially mature and have large market capitalizations (above $50 billion).

Moreover, these stocks boast a solid dividend-paying history. This adds to their appeal, especially in uncertain times as the present-day scenario. Retaining dividend stocks in one’s portfolio shows prudence, as these provide an avenue of steady income and a cushion against market risks. Our shortlisted stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Our Choices

UPS, with a current market cap of $140.45 B, is based in Atlanta. The package delivery entity is benefiting from the phenomenal rise in e-commerce demand during the pandemic.

UPS pays out a quarterly dividend of $1.52 ($6.08 annualized) per share, which gives it a 3.76% yield at the current stock price. UPS’ payout ratio is 48% of its earnings at present. (Check UPS’ dividend history here).

Union Pacific is based in Omaha, NE, and has a market capitalization of $121.02 billion, currently. UNP’s strong free cash flow-generating ability pleases us. It supports UNP’s shareholder-friendly activities. Cash from operations in 2021 came in at $9 billion, up 6% year over year. Free cash flow increased 8.8% to $3,523 million in 2021. The cash flow conversion rate was a healthy 73% in the first half of 2022. However, supply-chain woes are bothersome.

UNP pays out a quarterly dividend of $1.30 ($5.20 annualized) per share. The stock has a dividend yield of 2.68% and a payout ratio of 48% of its earnings at present. (Check Union Pacific’s dividend history here).

Norfolk Southern is based in Atlanta, GA, and currently has a market capitalization of $50.14 billion. NSC’s strong free cash flow generating ability supports its shareholder-friendly activities. In 2021, NSC generated a free cash flow of $2,785 million, up 30% year over year. In first-half 2022, free cash flow was $1,174 million. NSC expects current-year dividends in the 35-40% range of its net income. Management expects to utilize the remaining cash flow and financial leverage to repurchase shares.

NSC pays out a quarterly dividend of $1.24 ($4.96 annualized) per share. The stock has a dividend yield of 2.32%. NSC's payout ratio is 39% of its earnings at present. (Check Norfolk Southern’s dividend history here).

 

 


 

Published in