Union Pacific Needs New Leadership

By Michael Hooper

Union Pacific (NYSE: UNP) needs new leadership. Union Pacific recently announced it plans to replace CEO Lance Fritz. The announcement on Sunday, Feb. 26, 2023, follows a Wall Street Journal report citing a hedge fund's call for his replacement.

Soraban Capital Partners says that under Fritz, UNP employees are disgruntled. Among all S&P 500 companies, UNP is rated by employees as the worst place to work, and has the lowest employee CEO approval rating. The company is not delivering on its commitment to customers, and the Surface Transportation Board has singled out UNP as providing the worst service among Class 1 railroads.

Union Pacific has around 32,000 employees, including about 800 employees in Kansas where it maintains about 2,199 miles of track.

One of the disturbing trends of Union Pacific is using debt to re-purchase shares and pay dividends while ignoring the needs of customers and employees.

Union Pacific easily makes enough money to cover its dividend, but has been re-purchasing shares at a significant rate, resulting in the need to borrow money.

Long-term debt at Union Pacific has grown from $15.6 billion in September 2016 to $33.3 billion on Dec. 31, 2022, essentially doubling the debt during that time. But -- and this is huge -- total carloads/intermodal traffic actually declined from 9 million in 2015 to 8 million in 2022.

Yet Union Pacific continues to re-purchase shares and has announced a new share repurchase program with authorization to re-purchase up to 100 million common shares through March 31, 2025. Under this new program the company could reduce share count by a whopping 16%. 

However, share repurchases essentially benefit only shareholders of the stock, i.e. Wall Street. This form of using capital does not benefit customers, it does not benefit employees unless they own the stock, and it also doesn’t benefit the rail network. A better way to grow a company is to build organic growth in the business, using capital in strategic places that will benefit customers and the network. There have been times in the past few years that Union Pacific has turned away business because it did not have the employees or equipment in order to serve these customers. 

In April 2022, Pilot Flying J CEO Shameek Konar said Union Pacific informed Flying J to reduce diesel rail shipments by 26%, then in subsequent conversations with the railroad, Union Pacific asked them to reduce rail shipments by another 50% or face embargoes. Essentially Union Pacific was turning away business because it could not handle it. 

Railroads cut employees too deep while lengthening their trains from 1 mile to 2 miles. So you have more cars on the track with fewer people looking after them. As a result you get situations like what happened in Ohio with Norfolk Southern, a disaster that will have health and environmental consequences for years to come.

Borrowing money in order to buy back shares is going to cost more money because interest rates have been rising over the past year. This strategy will be crippling to the business if we have a recession and  earnings decline. You can’t continually raise prices in order to grow earnings. Shippers will look elsewhere for moving their freight. 

I hope the next CEO improves the balance sheet and puts capital into growth markets, and looks for ways to increase safety, morale, and ensure the franchise grows in book value and market value at the same time. Earnings will grow as a result of all these other measures over time. Don’t grow value by buying back shares.

Union Pacific released a press release on Feb. 26, saying under Fritz's leadership, the company has achieved a 52% increase in net income, a 27% increase in operating income and a 3.7 point increase in return on invested capital. Fritz guided the company to achieve this financial growth despite the volatile operating environment spurred by the COVID-19 pandemic, global supply chain disruption, labor negotiations and service and labor challenges, while instilling an inclusive and accountable organization with an industry-leading sustainability program.

“The Board is grateful to Lance for his unwavering leadership, dedication and oversight in driving our company forward over the last eight years as CEO. Lance created an environment that has allowed Union Pacific to make a measurable impact with our customers, communities and employees alike,” said Michael McCarthy, Lead Independent Director of the Board. “He has capably led our company during a time of significant challenge and change, positioning Union Pacific to deliver long-term sustainable value for shareholders and customers. We are immensely grateful to have Lance’s continuing leadership and support and know he will ensure a smooth transition.”

“It is my honor and privilege to serve this great company. I am proud of our team and all we have built together,” said Fritz, Union Pacific Chairman, President and Chief Executive Officer. “I’ve always said that our fundamentals for long-term success are powered by our people – our best-in-class employees and the passion they have for our customers and communities. Union Pacific has embarked on a transformative journey that will result in stronger, more consistent service for our customers, with enhanced earnings growth and value creation for our shareholders. Union Pacific has been my home for 22 years and I am confident that now is the right time for Union Pacific’s next leader to take the helm. I look forward to working with the Board as we identify our next CEO to lead the Company into the future.”

Michael Hooper, editor of Thoughtful Investor, owns shares in Union Pacific (UNP).