Union Pacific Corporation (UNP): High Dividend Growth and a Durable Moat

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Union Pacific has a Dividend Growth Score of 66, which suggests that its dividend growth potential is somewhat above-average.

The company has paid uninterrupted dividends since 1998 and increased its dividend every year since 2007. Union Pacific appears set to join the Dividend Achievers Index in the next year.

The company increased its total declared dividends per share by 15% in 2015 and has compounded its dividend by 22% per year over its last 10 fiscal years.

Despite the company’s strong historical dividend growth, I expect dividend growth to moderate to a mid-single digit rate over the near term because of the macro challenges facing the business.

Valuation

Shares of Union Pacific trade at a forward-looking P/E ratio of 17.3 and have a dividend yield of 2.5%, which is higher than their five-year average dividend yield of 2%.

Over the long term, I believe Union Pacific’s earnings can grow at a 6-8% annual rate, which is about half as fast as the company’s earnings have grown over the last five years.

Freight demand should increase with population growth over time, and Union Pacific’s business model employs a good amount of operating leverage to realize faster earnings growth.

Under these assumptions, the stock appears to offer annual total return potential of 9-11% per year (2.5% dividend yield plus 6-8% annual earnings growth).

The stock doesn’t look like a bargain today, but it does appear to be reasonably priced considering its high business quality.

If commodity headwinds intensify and further pressure the business, Union Pacific’s stock could become very attractively priced for new investment money.

Conclusion

Union Pacific Corporation (NYSE:UNP) is a durable company that is sensitive to economic growth and a number of different commodity markets.

While current macro conditions are far from ideal and could certainly get worse from here (no one knows), the long-term outlook remains stable in my view.

Freight demand should continue to expand with population growth, and Union Pacific’s railroads will likely remain an essential component of our country’s supply chain for many years to come.

As long as we are not on the brink of another recession or a bigger bust in commodity markets, Union Pacific appears to be reasonably priced for long-term dividend growth investors seeking exposure to industrial-sensitive stocks. Its the type of company I like to own in our Top 20 Dividend Stocks portfolio.

Disclosure: None