The resilience of this stock market is uncanny. Just when transportation stocks, a leading market sector at any time, took a well-deserved break, components turned upward and are once again pushing record highs.
Union Pacific Corporation (UNP) is a benchmark stock in transportation. It’s up fivefold since the stock market low in 2009 and looks to have continued upward price momentum.
This is an exceptional performance for such a mature, old economy type of enterprise. The position has a forward price-to-earnings (P/E) ratio of approximately 17 with a current dividend yield of 1.8%.
Three weeks ago, Union Pacific increased its quarterly dividend 10% to $0.50 a share, payable October 1, 2014 to shareholders of record on August 29, 2014.
In three of its last five quarters, the company has increased its quarterly dividend at a double-digit rate and as much as anything else, this is responsible for its great stock market performance.
Union Pacific had an exceptionally good second quarter. Freight revenues grew 10%, driven by gains in freight volume and rising prices.
The company’s operating ratio, which is key in the railroad industry, hit an all-time quarterly record of 63.5%, and management bought back 8.3 million of its own shares during the quarter, spending $806 million.
It’s a very good time to be in the railroad business. Not only are the pure-play rail companies mostly doing well, but the railroad services sector is also experiencing great business conditions.
The Greenbrier Companies, Inc. (GBX) is a company we’ve looked at before. It has been a huge stock market success. (See “Why These Stocks Are a Leading Indicator of the Market and What They Foresee Now.”) After a recent stock market consolidation, which was followed by a small sell-off, the position shot up ten points to its current all-time record high.
Wall Street estimates for Greenbrier have also been increasing and the company is likely to experience continued upward price momentum on the stock market.
As odd as it sounds, in this day and age, where technology seems like the highest growth sector, the business of delivering freight by rail is really good.
Demand for new railcars and those that carry hydrocarbons is very strong; the energy production boom is a major catalyst.
And it’s not just oil representing the freight growth. Fracturing sand is also contributing to the boom times in the railroad business.
It may be old school, but what happens in the transportation sector is material to the direction of the broader stock market.
The Dow Jones Transportation Average is back after a well-deserved sell-off. And if Union Pacific and Greenbrier have upward price momentum on the stock market, then it’s highly likely the broader market will too.
It’s hard to imagine railroads still being so influential on the economy and Wall Street—but they are, and as a leading indicator, the trend in rail is very positive.