Despite high capital expenditures and debt levels, Union Pacific Corporation (UNP - Free Report) has numerous tailwinds on its side.
The company has been benefiting from impressive growth in freight revenues for quite some time. Evidently, freight revenues — accounting for bulk of its top line — increased 8% year over year in 2018. Although the first-quarter freight revenues took a hit due to a sluggish freight scenario, the situation is expected to turn around in the remaining year.
Additionally, improvement in the company’s operating ratio (operating expenses as a percentage of revenues) is indicative of its operational efficiency. Notably, this key metric improved 1.1 points year over year to 61.6% during 2018. Lower the value of the operating ratio, the better. The company expects 2019 operating ratio to be below 61%. The metric is anticipated to be below 60% by 2020.
Moreover, the company’s move to incorporate the principles of Precision Scheduled Railroading model through the Unified Plan 2020 should increase efficiencies significantly. The program, expected to be fully implemented by mid-2019, aims to ensure a safe, reliable and efficient railroad operation. The company’s efforts to promote safety and enhance productivity also hold promise. To this end, Union Pacific’s progress toward installing a positive train control (PTC) in its network is commendable.
Union Pacific’s initiatives to reward investors through share buybacks and dividend payouts further add to the air of positivity surrounding the stock. This February, the company increased its quarterly dividend by 10% to 88 cents per share, marking the fourth dividend hike announced since November 2017. Also, the company's board approved a new share repurchase program to buy up to 150 million of its common stock. During the first quarter of the ongoing year, it bought back 18.1 million shares for $3.5 billion. Last year, the company returned around $10.5 billion to its stockholders through $8.2 billion in buybacks and $2.3 billion in dividends.
On the back of these upsides, shares of the company have gained 18.5% in a year’s time, outperforming the industry’s 17.3% rally.
Surrounded by such optimism, the Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company has moved 1.3% north in the last 60 days. The same for full-year earnings has been revised 1.1% upward.
In light of the aforementioned factors, we believe, investors should hold onto the Union Pacific stock for now.
Stocks to Consider
Some better-ranked stocks in same space are CSX Corporation (CSX - Free Report) , Kansas City Southern (KSU - Free Report) and Norfolk Southern Corporation (NSC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of CSX, Kansas City Southern and Norfolk Southern have gained more than 18%, 9% and 29%, respectively, in a year’s time.
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