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A Railroad Company With Autonomous Technology?
Railroads are an overlooked investment opportunity and you can take advantage with Dividend Achiever Union Pacific.
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Today we’ll be taking a deep dive into the company Union Pacific Corporation. UNP is a Dividend Achiever and is certainly worth a deep dive.
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Union Pacific Corporation (UNP)
Highlights
Union Pacific owns an astounding 32,000 miles of track, spanning the western two-thirds of the U.S.
Union Pacific ships a multitude of goods, oil, coal, grain, fertilizer, and cars to name a few.
Labor shortages and potential strikes have plagued the industry for years— reason enough to avoid UNP?
Dividend growth has been tremendous, UNP raised at a 10 year CAGR of 15.25%.
Company Profile
Union Pacific Corp. engages in the provision of railroad and freight transportation services. Its principal operating company, Union Pacific Railroad Co., operates as a railroad franchise. The Railroad's diversified business mix includes agricultural products, automotive, chemicals, coal, industrial products, and intermodal. The company was founded in 1969 and is headquartered in Omaha, NE.
Thesis
In the U.S. where 40% of total shipments are sent by train, Union Pacific is primed to shine. Union Pacific is one of the country’s largest railroad companies, and demand for train shipments is poised to keep growing. Economists are forecasting increased demand for coal, e-commerce goods, and other bulk items for years to come, and its extensive rail network puts it miles ahead of the competition (literally) .
Recent News
Positives
Wide Moat & Barrier From Competitors
Union Pacific has many factors that contribute to its wide moat. As you can see from the map above, they cover about 2/3 of the U.S. with over 32,000 miles of track. The areas covered by Union Pacific are some of the fastest growing areas in the U.S. and by owning all this track they have a huge advantage over competitors. Chances are if you need to send something by train in the western two-thirds of the U.S., you have to go through Union Pacific.
Railroads are very costly and hard to build but are critical to the freight infrastructure of the United States. This capital intense and extremely time-consuming process makes it very difficult for companies to compete with Union Pacific.
Diversified Shipments
Union Pacific also benefits from diversification in their shipments. They operate in 4 segments: Industrial, Premium, Bulk, and Other.
Industrial - Ships chemicals, plastic, metals, minerals, forest products, and oil
Premium - Ships automobiles and intermodal containers which come off of container ships and get moved onto other carriers like trucks.
Bulk - Ships grain, fertilizer, food, and coal.
Other - Amtrak passenger train company pays Union Pacific annually to use their rails.
Demand For Coal Is Growing
The worldwide energy crisis is being caused by sanctions placed on Russian exports. This has brought about an increase in coal demand to fill our energy needs. Coal consumption is expected to reach all time highs in 2022 and continue higher in 2023.
This puts Union Pacific in a good position. Coal is most effectively delivered via train and Union Pacific’s vast rail network can get it from midwestern coal mining regions to most of the U.S.
Shareholders Are Rewarded Handsomely
Shareholders of Union Pacific are well taken care of. Union Pacific has bought back one-third of its total outstanding shares in the last 10 years, rewarding shareholders with a bigger percentage of ownership year after year.
Shareholders have also received above-average dividend growth as well, with a 10% raise delivered last quarter. More on the dividend later.
Investment In TuSimple
Union Pacific has invested $350 million into the company TuSimple. TuSimple is a leader in autonomous driving technology and has been tasked with creating driverless semi trucks to haul freight. This is huge for Union Pacific because not only will they be able to compete with trucking companies, they’ll be able to do it at a much cheaper cost. It’s reported that TuSimple is also working on autonomous train technologies as well. Union Pacific’s rail dominance combined with autonomous trucking will set it up for years of success.
Demand For Freight Is Growing Substantially
Union Pacific also benefits from expected, increases in freight volume. The US Department of labor expects freight volume to grow 50% by the year 2050. The rise of e-commerce also will contribute to these increase in freight. currently, e-commerce sales account for 19 percent of overall shipments, and the way things are trending with more people buying online means more freight will be coming.
40% of all freight that enters the US by container ship comes in through Los Angeles and Long Beach Ports in California. Union Pacific is uniquely positioned to capitalize from this, as many of its tracks are located near the 2 ports. The intermodal shipping containers that arrive off the boats have 2 options to be transported from the port: by truck or by train. Shipping by train is vastly more efficient because trains can carry 20+ containers at a time while trucks can only carry one. Trains are also more fuel efficient going long distances than trucks and emit fewer carbon emissions.
Negatives
Very U.S. Dependent
One major drawback for Union Pacific is that it only has tracks within the United States. It takes in about 31% of its shipments from international clients but its tracks do not extend past the Canadian or Mexican borders. An economic slowdown in the U.S. is detrimental to Union Pacific’s success and is something worth watching.
Very Tied To Fuel Prices
Another negative for Union Pacific is that its margins are heavily tied to fuel prices. While the company has made great efforts to pivot to battery and biofuel operated trains, the majority of trains still run on diesel which is made from crude oil. If the price of crude oil continues to spike like it has so far in 2022, profit margins will get shredded.
Railroad Industry Jobs Are In Decline
How many kids nowadays do you think want to grow up to be a railroad worker? I’m willing to bet not many. Railroads have been in a serious labor shortage and worker numbers have declined for decades. As workers age out, people need to come in and fill those roles. Unless companies intervene and make railroad jobs vastly more appealing I don’t see this trend turning around.
Capital Intensive Industry
Being in a capital intensive industry is great for keeping away competition, but debt can add up very quickly. Railroads are an extremely costly industry, with estimates coming in at about $1.5 million or more per mile to build.
In an era where it’s becoming more expensive to borrow money, growing the tracks and the company is going to be difficult. The Debt-to-Equity ratio has steadily been climbing and that is not a welcome sight to see as we move into an era of higher interest rates.
Worker Strikes
Over the past 3 years, frustration has been brewing for railroad workers. Behind record revenue years for railroad companies lies thousands of disgruntled workers claiming that grueling work hours and poor working conditions have become too much and that they aren’t fairly compensated. According to a recently issued Association of American Railroads report, a U.S. railroad worker strike would cost the U.S. economy $2 billion per day.
As of September 16th, workers agreed to a tentative deal proposed by President Biden and will not strike until the votes are tallied. It is reported that workers will receive better pay with wages expected to increase 24% over 5 years, and more flexible schedules with time off for medical appointments.
All eyes are on the unions to see if they agree to ratify the deal.
The Dividend Breakdown
For those that don’t know, I mainly use 3 metrics to assess the quality of a company’s dividend. The first is the Dividend Growth Rate, which I use to assess the company’s ability to raise dividends and combat inflation. When assessing the Dividend Growth Rate, I look at the 10 Year Compound Annual Growth Rate (CAGR) because it’s usually the longest-term data readily available and more indicative of long-term company trends. The second metric I use is the Dividend Payout Ratio, which tells me how much of the company’s profits are going to shareholders. The Dividend Payout Ratio also shows me how much room a company has to grow its dividend before it becomes unstable. The last dividend metric I use is Dividend Yield. Dividend Yield tells me how much “bang for my buck” I get as a shareholder. Yield isn’t everything, but it’s nice to see how much money I’ll get back as an investor in the next quarter.
With that being said, I’ve developed a scoring method for rating a company’s dividends. It consists of the previously mentioned metrics scored out of 5 and each score is multiplied and weighted by importance. The highest possible score a company can receive is a 31, and members of the Dividend Aristocrats club will receive an extra point for their long-standing history of reliable dividend raises. Each metric has its own criteria which I’ll share below:
Dividend Growth Ratio is the most important metric for me, so scores will be multiplied by x3
Dividend Growth Ratio of 0%-5% is a 1, 5%-7% is a 2, 7%-9% is a 3, 9%-12% is a 4 and a rate of more than 12% is a 5
Dividend Payout Ratio is the second most important metric, so scores will be multiplied by x2
Dividend Payout Ratio of 95% or more is a 1, 75%-95% is a 2, 55%-75% is a 3, 35%-55% is a 4 and a rate of less than 35% is a 5
Dividend Yield is the least important metric of the 3, so scores will be multiplied x1
Dividend Yield of 0%-1.5% is a 1, 1.5%-2.5% is a 2, 2.5%-3.5% is a 3, 3.5%-4.5% is a 4 and a rate of more than 4.5% is a 5
UNP’s scores are shown below:
UNP’s 10-year Dividend Growth Rate (CAGR) is 15.25%, obliterating the Industrials sector median of 7.86%. Their Dividend Payout Ratio is 46.2%, sort of in the middle of the road. Its dividend yield is 2.61%, which is higher than its 4-year average yield of 2%. Compared to the median yield of 1.69% in the Industrials sector, UNP’s 4-year average yield is higher. Lastly, UNP has been paying a dividend for 32 years & raising it for 15. Overall, UNP scored 26/31 points, and it’s among the top dividend paying companies I’ve looked at. It is worth mentioning that UNP raised its dividend by 18.84% in trailing twelve months, crushing the 8%+ inflation we've had to deal with.
Final Thoughts
Union Pacific provides a compelling investment opportunity. Railroads are an underrated investment opportunity in my opinion and Union Pacific is the best of the best. With demand expected to increase for bulk items and e-commerce goods, coupled with the sheer competitive advantage of owning over 32,000 miles of track, Union Pacific is primed for success for years to come.
I plan to initiate a position at $171.50.
What do you think about UNP? Is it a company you’ll add to your portfolio? Why or why not? Let me know on Twitter @DrDividend47 or in an email to [email protected]!
Memes Of The Week
Elon Musk was formally dunked on by Ukranian Diplomat Andrij Melnyk.
I think Elon got ratio’d so hard that it made him change his mind (again) about buying Twitter.
Now that Elon is buying Twitter the slackers better watch out 👀
In other news, Tom Brady and his wife Gisele are divorcing due to him refusing to retire 😂. A meme mashup of one of my favorite football players and favorite tv shows is too good to pass up.
Kim Kardashian is on the hook for $1.3 million for pumping obscure cryptocurrency Ethereum Max (seriously, wtf is Ethereum Max??).
Totally unrelated but I'm also in search of a new financial advisor...
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