Strong Cash Flow, Increasing Dividends Make This Old Economy Stock Attractive

By

Increasing Dividends Make This Old Economy Stock AttractiveBlue chips across the board have been taking a break, along with the rest of the stock market. But in my mind, their leadership remains intact, and so does the performance of the Dow Jones Transportation Average.

This index recently broke below its 50-day simple moving average (MA), but this is very normal and not a trendsetting event. Many component stocks have been on fire all year and are due for a sustained period of retrenchment.

One component company that I continue to like is Union Pacific Corporation (UNP). The railroad sector is old economy, but it’s still a solid gauge on domestic economic activity. Plus, Union Pacific is a solidly profitable company that provides growing dividends to shareholders. The stock is currently yielding 2.1%.

Perusing the company’s regulatory filings, what stands out is Union Pacific’s strong financial recovery from 2009, when business operations experienced a pronounced downturn. Of course, we’re dealing with a very mature blue chip company, so financial growth isn’t like a small-cap technology stock. But the company really did turn its financial metrics around in a diligent manner, and the results are evidenced in its share price performance.

Union Pacific Corporation Chart

Chart courtesy of www.StockCharts.com

Union Pacific’s operating revenues dropped significantly from $18.0 billion in 2008 to $14.1 billion in 2009. But the recovery was swift, as 2010’s operating revenues came back up to $17.0 billion, followed by $19.6 billion in 2011 and $20.9 billion last year.

Notable in the company’s economic recovery was its earnings and dividend payments to shareholders.

Earnings in 2009 fell to $1.89 billion from $2.3 billion in 2008. They recovered commensurately with revenues to $2.8 billion in 2010, $3.3 billion in 2011, and $3.9 billion in 2012.

Dividends per share also accelerated, even through the 2009 down year, while the company’s debt-to-capital ratio fell consistently since 2009 and return on average shareholders’ equity improved substantially.

It’s this track record of financial success and recovery from the significant downturn that stands out as a major selling feature for Union Pacific. Every company experiences its own business cycle, and a diligent management team along with increased dividends kept investors interested in this stock.

The year 2012 was a record operating performance year for Union Pacific, and even if there is no full-year volume growth this year, company management still expects 2013 earnings to exceed those of 2012. From my perspective, these expectations are worth owning.

Railroad stocks aren’t for everyone, but as part of a long-term equity portfolio of blue chips, I think a railroad company should be included.

A stock like Union Pacific is the kind of enterprise that you watch and keep an eye on, perhaps on a monthly basis, looking for opportune times to consider new positions. I’m not an advocate of buying this market currently—it’s already gone up and certainty regarding monetary policy is in flux. (See “Why Corporate Earnings Are Taking a Back Seat to the Fed.”)

Union Pacific recently increased its dividend again by 14.5%, or $0.10 per share, to $0.79 quarterly. Strong cash flows and other solid financial metrics continue to make this company an attractive security for long-term portfolios.

Retire on one hot stock

Presenting Our Top Stock Pick for 2015!

It is one of the leading companies in its industry. With quarterly revenue of $800 million and growing this company is generating over $300 million every three months in free cash flow!

"A Golden Opportunity for Stock Market Investors" is yours FREE when you opt-in to get our daily e-letter Profit Confidential. With Profit Confidential you are receiving the opinions and commentaries of seasoned financial analysts and economists. We analyze the actions of the stock market, precious metals, interest rates, real estate, and other investments so we can tell you what we believe today's financial news will mean for you tomorrow!

Combined, we have over 100 years' experience in analyzing various investment markets. Our analysts include MBAs, BAs, B.Comms, P.Engs, MAs, LLBs...and most importantly, years of experience investing and managing our own money successfully!

To opt-in to our FREE e-letter Profit Confidential and to get your FREE report, "A Golden Opportunity for Stock Market Investors," enter your e-mail address in the box below. You can unsubscribe at any time.

We hate spam as much as you do. Check out our Privacy Policy.

About the Author | Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

Related Articles

Video: Here is why you should be Bullish on Gold | By: Michael Lombardi

Poll

Would you vote for Donald Trump if he was the Republican Nominee?

View Results

Loading ... Loading ...
Profit Confidential
×
54.196.237.196
From: Michael Lombardi, MBA
Subject: Gold: The Stock Contrarian Investors’ Best Play of the Decade

Read this message