Union Pacific Is Attractive With Five Positive Trends

By Michael Hooper

Union Pacific (UNP) has recently exhibited five positive trends that make its stock look attractive at current prices.

The five trends are steady-to-growing volumes in the first 18 weeks of the year; higher pricing; a fuel surcharge; a dividend over 2% and a stock buy-back program that is like a revolving bank.

With those trends in place and the stock down 9% year to date, Union Pacific looks attractive.

The S&P 500 is down 18% so far this year, through May 12, 2022. The NASDAQ is down 27% year to date. My portfolio is down 4% year to date. I am overweight Berkshire Hathaway (BRK/B) (48% of my total portfolio), the rest of my portfolio includes consumer defensive stocks like PepsiCo and Coca-Cola and Hershey, railroads, utilities and dividend aristocrat ETF (NOBL).

I’ve watched Union Pacific stock for over 20 years. I once had a client who paid $8,500 for shares of Union Pacific Railroad stock in 1948. By 2012 those UNP shares were worth over $2 million and paid $36,000 annually in dividends.

Another reason Union Pacific is such a good investment is limited competition, its chief competitor is BNSF Railway, owned by Berkshire Hathaway. Union Pacific owns the Central Corridor from Denver to Winnemucca, Nevada. The route includes the famous Moffat Tunnel in the Rocky Mountains of Colorado, the tunnel with 6.2 miles represents the highest point in the UP line. There were 28 people who died during the construction. Many of them died when they discovered a lake inside the mountain. Water from the lake goes to Denver.

Total volumes of traffic at Union Pacific railroad were up 2% year to date and total carloads excluding intermodal where was up 9% year to date through Week 18 ending May 7. So far in the second quarter, carloads were up 3% but intermodal was down 10%, so total volume was down 3%

Revenue was up 17% in the first quarter due to higher volumes, fuel charges and favorable pricing and mix.  

Union Pacific Railroad will struggle to grow volumes because of a shortage of staff and constraints in the supply chains. The war in Ukraine, the Covid-19 Pandemic in China, where so much of our imports come from, and inflation may hurt traffic. Intermodal traffic will decline as imports fall off.

The railroad's dividend is yielding 2.09% yield at today’s prices. Generally speaking a good rule of thumb for this stock is Union Pacific is a buy when the dividend is over 2% and it’s a hold or a sell when it’s under 2%.

Historic Dividend Yield for one year from YCharts

The one-year chart shows the dividend yield spent much of its time below 2%.

According to gurufocus, UNP's dividend yield has ranged from 1.47% to 3.22%, with the median of 1.92% over the past 10 years.

I own UNP and CSX (CSX), Canadian Pacific (CP), Canadian National Railway (CNI) and Norfolk Southern (NSC). My favorite is Union Pacific.

Union Pacific was recently trading at $230.80 per share. I think it's a buy from here to $241.00. However, because of extreme volatility, the stock may revisit current prices or go lower in the near term. But I expect this stock to perform well over the next two to five years and beyond.

Editors note: Michael Hooper owns shares in UNP, CSX, CP, CNI, NSC and BRK/B.