Union Pacific Raises Dividend - Analyst Blog

Yesterday, the Board of Directors of Union Pacific Corp. (UNP) decided to raise the quarterly dividend by 15% to 38 cents per share from 33 cents. Remarkably, this is the second time in 2010 that the company has decided to increase its dividend rate.

In early 2010, Union Pacific raised it dividend to 33 cents from 27 cents. Together, the company has raised dividend by a whopping 40.8% in 2010 alone.

On the same day, in another major boost to Union Pacific, Standard & Poor's Ratings Services has uplifted the rating of the company to “BBB+” from existing “BBB.” Both of these are lower medium grade rating of S&P however, the overall financial outlook of Union Pacific is now upgraded to “Stable” from “Positive.”

We believe, the major reason for the S&P rating upgrade as well as management decision of dividend increase is the record performance of the company during the last couple of quarters. This blockbuster performance was achieved through best-ever operating ratio, massive growth in business volume, cost efficiency, and pricing gains.

Third quarter of 2010 operating ratio was at its historic best at 68.2% compared to 73.8% in the prior-year quarter. This is the second straight quarter that Union Pacific has achieved a sub-70 benchmark.

An improving U.S. economy, massive surge in automotive shipments, and a sharp rebound in many end-markets is expected to fuel the future growth of the Railroad industry. The U.S. freight railroad industry is witnessing gradual improvement since early 2010. As the U.S. economy continues to grow, demand for carriage also becomes robust and the momentum is expected to sustain in the long-run.

During the first nine months of 2010, Union Pacific generated $2,720 million of cash from operations compared to $2,199 million in the year-ago period. Free cash flow during the same time period was $1,034 million, compared to $391 million in the year-ago period.

This healthy liquidity position together with solid future business visibility encouraged the company to the raise dividend rate. We believe these are the primary reasons for the S&P credit rating upgrade.

Union Pacific competes with other freight railroad operators in the U.S. like KansasCitySouthern (KSU), CSX Corp. (CSX), and Norfolk Southern Corp. (NSC). Currently, we have a Neutral recommendation on Union Pacific which is supported by a short-term Zacks #3 Rank (Hold).

 
CSX CORP (CSX): Free Stock Analysis Report
 
KANSAS CITY SOU (KSU): Free Stock Analysis Report
 
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
 
UNION PAC CORP (UNP): Free Stock Analysis Report
 
Zacks Investment Research