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What Does Union Pacific's Dividend Hike Mean for Railroads?

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Last week, Union Pacific Corporation (UNP - Free Report) — one of leading players in the railroad space — announced a 10% hike in its quarterly dividend payout to 66.5 cents per share (annualized $2.66 per share). The first installment of the hiked dividend will be paid on Dec 28, 2017, to shareholders as of Nov 30.

The raised dividend highlights Union Pacific’s commitment to create value for shareholders and underscores the company’s strong financial condition as well as bright prospects, going forward. Moreover, a look at past records reveals Union Pacific’s stable dividend payment history.

Shareholder-Friendly Measures Highlight Strong Balance Sheets

Union Pacific is not the only railroad operator to have increased its dividend payout. Fellow railroad operators like Kansas City Southern (KSU - Free Report) , Canadian Pacific Railway Ltd. (CP - Free Report) and Canadian National Railway (CNI - Free Report) have also raised their dividend payouts this year. Additionally, the board of directors at Norfolk Southern Corporation (NSC - Free Report) cleared a new share buyback program in October 2017. The company is now authorized to buy back an additional 50 million shares through Dec 31, 2022.

These investor-friendly measures adopted by railroads clearly highlight the financial prosperity of stocks in the space. Additionally, the strengthened balance sheets of sector participants have made them invest substantially for promoting safety and enhancing productivity.

All the above-mentioned stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Railroads Prosper Due to Multiple Tailwinds

The robust financial health of railroads bears testimony to the fact that the scenario has improved considerably for players in the sector, after being battered by the coal-related headwinds for the last few years.

In fact, the main reason behind the turnaround in fortunes of this key sector can be attributed to an improvement in the coal-related scenario. This is because coal is regarded as a key revenue generating commodity at railroads.

Moreover, prospects of the coal industry have brightened because of Donald Trump’s pro-coal stance, whereby he has promised to relax emissions rules. Higher price of natural gas and improvement of coal prices in global market have also boosted demand for this key commodity. As fortunes of most railroad operators depend on coal, any positive development related to this commodity augurs well for railroads.

Improvement in intermodal volumes is also a positive for railroads. In fact, according to the Intermodal Association of North America, intermodal volumes registered the highest growth rate in the third quarter of 2017. Volume growth, pertaining to intermodal, was impressive in the earlier two quarters of 2017 as well.

Furthermore, efforts of railroads to drive bottom-line growth through cost-cutting measures raise optimism in the stocks from this space. Improvement in a key metric — operating ratio (operating expenses as a percentage of revenues) — also augur well for railroad operators.  Evidently, this key metric improved at CSX Corporation (CSX - Free Report) , Norfolk Southern and Genesee & Wyoming (GWR - Free Report) in the third quarter.

Price Performance

Driven by the above-mentioned tailwinds, the Zacks Rail industry has outperformed the broader market so far this year. While the S&P 500 Index gained 15.7%, the industry rallied 19.2%.

Union Pacific’s Dividend Hike Augurs Well

Based on optimism surrounding railroads, we applaud Union Pacific’s decision to raise its quarterly dividend as it indicates brighter days ahead.

As investors prefer an income generating stock, a high dividend paying one is much coveted. Needless to say, investors are always on the lookout for companies that have a track record of consistent and incremental dividend payments. Consequently, we believe that they should consider stocks in the space as lucrative investment options.

The Zacks Industry Rank of 100 (out of 250 plus groups) carried by the Zacks Rail industry further highlights the attractiveness of railroads. The favorable rank places the companies in the top 39% of the Zacks industries.

We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one week rebalance, the top half surpassed the bottom half by a factor of more than 2 to 1.

Click here to know more: About Zacks Industry Rank

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