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Union Pacific's (UNP) Dividends Support, Cost Woes Sting
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Union Pacific Corporation’s (UNP - Free Report) efforts to reward its shareholders through dividends and buybacks attest to its financial strength. However, headwinds like high operating expenses and tepid automotive freight revenues are hurting its overall volumes. Currently, UNP carries a Zacks Rank #3 (Hold).
Let’s delve deeper to unearth UNP’s share of tailwinds and headwinds.
We are bullish on UNP’s ability to generate cash. 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. Increasing free cash flow supports the shareholder-friendly activities at Union Pacific. In 2021, UNP returned $10.1 billion to its shareholders through dividends ($2.8 billion) and buybacks ($7.3 billion).
Union Pacific hiked dividend twice in 2021. In May 2022, UNP upped its quarterly dividend by a further 10% to $1.30 per share. UNP is also active on the buyback front. In the first quarter of 2022, UNP returned $3.5 billion to its shareholders through dividends and share repurchases. The cash flow conversion rate was a healthy 86% in the March quarter. Management anticipates share repurchases in 2022 to be in line with the 2021 levels. Additionally, UNP expects a dividend payout of approximately 45% (of earnings) in 2022.
With economic activities gaining pace, freight revenues, accounting for bulk of the company's top line, are improving. Freight revenues improved 11% year over year in 2021. In first quarter-2022, freight revenues improved 17% year over year. Segment wise, freight revenues in the March quarter increased 21%,16% and 14% in the bulk, industrial and premium units, respectively.
However, at the Wolfe Research Conference, UNP's management stated that the second quarter's overall volumes were down 3% quarter to date (data as of May 19, 2022). The downside was mainly due to a 7% decline in volumes in the premium segment.
Moreover, the increase in fuel costs due to the uptick in oil prices is limiting bottom-line growth. In 2021, fuel expenses increased 56% year over year to $2,049 million at Union Pacific. In first-quarter 2022, fuel expenses escalated 74%. Higher fuel price hurt the operating ratio (operating expenses as a % of revenues) to the tune of 80 basis points in the March quarter.
Rising fuel prices and the current operational performance are likely to prevent this key ratio from achieving the full-year target of 55.5% (set in January). Also, weaka utomotive freight revenues are concerning. Semiconductor shortage is hurting automotive revenues.
Stocks to Consider
Some better-ranked stocks within the broader Transportation sector are as follows:
Golar LNG Limited (GLNG - Free Report) currently flaunts a Zacks Rank #1 (Strong Buy). GLNG has a decent surprise history, with its earnings having outperformed the Zacks Consensus Estimate in three of the preceding four quarters, missing the mark once. The average surprise is 42.1%. You can see the complete list of today's Zacks #1 Rank stocks here.
Shares of Golar LNG have rallied more than 100% in a year. A strong LNG market boosted the stock. The surging inflation caused a spike in oil and natural gas prices substantially. Moreover, amid the Russia-Ukraine war, Europe is likely to look for gas supplies outside Russia. This is expected to drive demand for LNG vessels, which bodes well for GLNG.
Star Bulk Carriers (SBLK - Free Report) carries a Zacks Rank #2 (Buy), currently. SBLK's earnings surpassed the Zacks Consensus Estimate in three of the preceding four quarters and missed the mark once, the average surprise being 7.1%.
Shares of Star Bulk have gained more than 66% in a year. Improvement in economic activities is aiding the SBLK stock.
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Union Pacific's (UNP) Dividends Support, Cost Woes Sting
Union Pacific Corporation’s (UNP - Free Report) efforts to reward its shareholders through dividends and buybacks attest to its financial strength. However, headwinds like high operating expenses and tepid automotive freight revenues are hurting its overall volumes. Currently, UNP carries a Zacks Rank #3 (Hold).
Let’s delve deeper to unearth UNP’s share of tailwinds and headwinds.
We are bullish on UNP’s ability to generate cash. 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. Increasing free cash flow supports the shareholder-friendly activities at Union Pacific. In 2021, UNP returned $10.1 billion to its shareholders through dividends ($2.8 billion) and buybacks ($7.3 billion).
Union Pacific hiked dividend twice in 2021. In May 2022, UNP upped its quarterly dividend by a further 10% to $1.30 per share. UNP is also active on the buyback front. In the first quarter of 2022, UNP returned $3.5 billion to its shareholders through dividends and share repurchases. The cash flow conversion rate was a healthy 86% in the March quarter. Management anticipates share repurchases in 2022 to be in line with the 2021 levels. Additionally, UNP expects a dividend payout of approximately 45% (of earnings) in 2022.
With economic activities gaining pace, freight revenues, accounting for bulk of the company's top line, are improving. Freight revenues improved 11% year over year in 2021. In first quarter-2022, freight revenues improved 17% year over year. Segment wise, freight revenues in the March quarter increased 21%,16% and 14% in the bulk, industrial and premium units, respectively.
However, at the Wolfe Research Conference, UNP's management stated that the second quarter's overall volumes were down 3% quarter to date (data as of May 19, 2022). The downside was mainly due to a 7% decline in volumes in the premium segment.
Moreover, the increase in fuel costs due to the uptick in oil prices is limiting bottom-line growth. In 2021, fuel expenses increased 56% year over year to $2,049 million at Union Pacific. In first-quarter 2022, fuel expenses escalated 74%. Higher fuel price hurt the operating ratio (operating expenses as a % of revenues) to the tune of 80 basis points in the March quarter.
Rising fuel prices and the current operational performance are likely to prevent this key ratio from achieving the full-year target of 55.5% (set in January). Also, weaka utomotive freight revenues are concerning. Semiconductor shortage is hurting automotive revenues.
Stocks to Consider
Some better-ranked stocks within the broader Transportation sector are as follows:
Golar LNG Limited (GLNG - Free Report) currently flaunts a Zacks Rank #1 (Strong Buy). GLNG has a decent surprise history, with its earnings having outperformed the Zacks Consensus Estimate in three of the preceding four quarters, missing the mark once. The average surprise is 42.1%. You can see the complete list of today's Zacks #1 Rank stocks here.
Shares of Golar LNG have rallied more than 100% in a year. A strong LNG market boosted the stock. The surging inflation caused a spike in oil and natural gas prices substantially. Moreover, amid the Russia-Ukraine war, Europe is likely to look for gas supplies outside Russia. This is expected to drive demand for LNG vessels, which bodes well for GLNG.
Star Bulk Carriers (SBLK - Free Report) carries a Zacks Rank #2 (Buy), currently. SBLK's earnings surpassed the Zacks Consensus Estimate in three of the preceding four quarters and missed the mark once, the average surprise being 7.1%.
Shares of Star Bulk have gained more than 66% in a year. Improvement in economic activities is aiding the SBLK stock.