Union Pacific Corporation (UNP), CSX Corporation (CSX): Six Reasons to Invest in This Railroad

Union Pacific’s operating ratio clocked in at 65.7%, versus the operating ratios of 69%, 70.2%, and 68.6% for Kansas City Southern (NYSE:KSU), Norfolk Southern Corp. (NYSE:NSC), and CSX Corporation (NYSE:CSX), respectively. This means that Union Pacific only spent 65.7% of its revenue on operating expenses leaving more money for the bottom line and better opportunity to strengthen its balance sheet.

Best balance sheet

Union Pacific’s cash stands at 9% of stockholder’s equity, exceeded only by CSX Corporation (NYSE:CSX), where its cash stands at 11% in the most recent quarter. Union Pacific possesses the best balance sheet in terms of debt. As of the most recent quarter, Union Pacific’s long-term debt to equity ratio clocked in at 44% versus 51%, 83%, and 91% for Kansas City Southern (NYSE:KSU), Norfolk Southern Corp. (NYSE:NSC), and CSX Corporation (NYSE:CSX), respectively.

Union Pacific’s operating income exceeded interest expense by 14 times. General rule of thumb for a margin of safety resides at five, meaning Union Pacific stands more than capable of making its interest payment.

Dividends

In the most recent quarter, Union Pacific paid out 43% of its free cash flow in dividends. Currently, Union Pacific pays $3.16 per share per year in dividends, yielding about 1.9% as of this writing. So, you can collect an income stream while waiting for capital appreciation.

Conclusion

Drought conditions in the west will continue to negatively affect nationwide agricultural freight and low natural gas prices will serve as friction with coal freight throughout the transportation industry, including railroads. Moreover, a softening Chinese economy could put the skids on outgoing intermodal freight. However, other sectors of the economy, such as petroleum and housing, should serve as a balance. Union Pacific’s diverse revenue stream puts the company in the best position to benefit from the positives and minimize the negative impacts from the overall economic shifts.

The article 6 Reasons to Invest in This Railroad originally appeared on Fool.com and is written by William Bias.

William Bias owns shares of Union Pacific. The Motley Fool has no position in any of the stocks mentioned. William is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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