Union Pacific Corporation (NYSE:UNP) owns transportation companies, of which its principal operating company, Union Pacific Railroad Company, connects 23 states in the western 66% of the United States. On July 18, 2013, the company reported second quarter earnings of $2.37 per share, which beat the consensus of analysts' estimates by $0.02. In the past year the company stock is up 31.18% excluding dividends (up 33.2% including dividends), and is beating the S&P 500, which has gained 15.85% in the same time frame. With all this in mind I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the services sector of my dividend growth portfolio.
The company currently trades at a trailing 12-month P/E ratio of 17.81, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.33 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $10.93 per share and I'd consider the stock inexpensive until about $164. The 1-year PEG ratio (1.21), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 14.76%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 14.76%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 13.68%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.02% with a payout ratio of 36% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.6%, 20.7% and 15.1%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.02% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 7 years at a 5-year dividend growth rate of 29.8%.
Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling around in middle ground territory with a value of 47.6 but with downward trajectory, which is a bearish pattern. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is descending and about to cross below the red line with the divergence bars decreasing in height to the downside, indicating the stock has downward momentum. As for the stock price itself ($156.59), I'm looking at $160.82 to act as resistance and $149.15 to act as support for a risk/reward ratio, which plays out to be -4.75% to 2.7%.
- An appeals court in the states vacated a lower court's decision to certify a class action against railroad companies. This is a win for the companies in a case about whether they illegally colluded to fix the price of fuel surcharges. Thousands of freight-shipping companies are suing Union Pacific, CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC) and Burlington Northern Santa Fe over the alleged conspiracy, seeking billions of dollars in damages.
- The company declared a $0.79 per share dividend with an ex-date of 28Aug13 and payable on 01Oct13. This $0.79 per share dividend is a 14.5% increase from the prior dividend of $0.69 per share.
Union Pacific is inexpensively valued based on future earnings. Financially, the dividend payout ratio is very low based on trailing 12-month earnings. I don't doubt management will be able to continue to increase the dividend going forward and at double digit clips. Based on future earnings the dividend payout ratio goes down to around 28.9% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some downward pressure in the immediate future. The stock is inexpensive on valuation, has great dividend growth potential, and great earnings growth potential. It's because of these reasons I will layer into a position here because I know I can get it at a cheaper price soon.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: I am long UNP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.