Union Pacific (UNP) Stock Up 15.2% In 3 Months: Here's Why

Shares of Union Pacific Corporation (NYSE:UNP) have gained 15.2% in the last three months, outperforming the Zacks Rail industry’s rally of 8.8%.

Reasons Behind the Outperformance

Last month, Union Pacific reported better-than-expected revenues in the fourth quarter of 2017. Also, earnings per share as well as revenues increased on a year-over-year basis. Higher freight revenues on the back of volume growth contributed to the uptick. In first-quarter and full-year 2018, the company expects volumes to increase in the low single-digit range.

Additionally, Union Pacific’s efforts to control costs are impressive. Driven by improved efficiencies, the company has been able to reduce its operating ratio (operating expenses as a percentage of revenues) from the highs of nearly 90% in 2004 to below 65% currently. By 2019, it expects operating ratio to come in at around 60% (on an annual basis). Per the company, the metric might decline further to around 55%, after 2019.

The company’s efforts to reward investors through share buybacks and dividend payouts are encouraging too. Evidently, Union Pacific returned around $6 billion to its stockholders through dividends and buybacks in 2017. Of the $6 billion, approximately $4 billion were returned through share buybacks. Additionally, the company raised its quarterly dividend by 10% to 73 cents per share (annualized $2.92 per share) in February 2018.

The first instalment of the raised dividend will be paid on Mar 30, 2018 to shareholders as of Feb 28. In fact, this is the company’s second dividend hike in three months. In November 2017, the company had announced a 10% hike in its quarterly dividend payout to 66.5 cents per share. We believe that two dividend hikes in three months reflect its increased financial prosperity, following the introduction of the new tax law. The effective tax rate is expected to fall to 25% in 2018.

Union Pacific is not the only railroad operator to have increased its dividend payout. Fellow railroad operators like Norfolk Southern Corporation (NYSE:NSC) and Canadian National Railway (NYSE:CNI) have also raised their dividend payouts recently. Last year, Kansas City Southern (NYSE:KSU) had hiked its quarterly dividend payout as well.

Estimate Revisions & Zacks Rank

Upward estimate revisions reflect optimism in a stock’s prospects. Union Pacific scores impressively on this front too. In fact, this Zacks Rank #2 (Buy) company has seen the Zacks Consensus Estimate for current-quarter and current-year earnings being revised 16.1% and 16.4% upward, respectively, over the last 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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