A 10% Increase To The Union Pacific Dividend Shows How Great Management Is Performing

Aug. 9.14 | About: Union Pacific (UNP)

Summary

This is the third time in about 15 months the company has raised its dividend.

I believe the stock to be fairly valued on 2015 earnings estimates, but those estimates have risen recently.

The financial efficiency ratios have increased since the last earnings report.

I don't calculate a favorable risk/reward ratio on the stock right now and will wait to purchase a batch till we're closer to the ex-dividend date.

The last time I wrote about Union Pacific Corporation (NYSE:UNP) I stated, "I like the stock but won't be buying into it this week." Since the article was published the stock has decreased 1.62% versus the 2.33% drop the S&P 500 (NYSEARCA:SPY) posted. Union Pacific Corporation 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 24, 2014, the company reported second-quarter earnings of $1.43 per share, which were in line with the consensus of analysts' estimates. In the past year, the company's stock is up 20.76%, excluding dividends (up 22.71% including dividends), and is beating the S&P 500, which has gained 12.96% in the same time frame. Since initiating my position back on May 21, 2013, I'm up 18.97% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the services sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 19.23, 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 15.62 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.36), 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 14.09%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 14.09%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 14.73%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

My Target Price ($)

PEG

EPS next YR (%)

07Jul14

100.26

20.55

16.09

6.23

93

1.53

13.41

08Aug14

98.64

19.23

15.62

6.32

95

1.36

14.09

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Financials

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 1.85% with a payout ratio of 35% of trailing 12-month earnings while sporting return on assets, equity and investment values of 9.4%, 22.2% and 15.5%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 1.85% yield of this company alone is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 8 years at a 5-year dividend growth rate of 26.1%. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

07Jul14

1.82

37

9.1

21.6

15.5

08Aug14

1.85

35

9.4

22.2

15.5

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Technicals

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Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 44.09. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height. As for the stock price itself ($98.64), I'm looking at the 50-day simple moving average (currently $100.16) to act as resistance and $96.43 to act as support for a risk/reward ratio which plays out to be -2.24% to 1.54%.

Dividend Is Increased Again!

Recently, the company announced another dividend increase. This time it has increased the quarterly dividend by 10%, taking it from $0.455 per share to $0.50 per share. The ex-date for the dividend is August 27, 2014 with a pay date of October 1, 2014 for a forward yield of 2.03%. During 2014 alone, the company increased the dividend by 15.19% back in February (going from $0.395 per share to $0.455 per share) and now we have this 10% increase. Since I have owned the stock (May 21, 2013), the company has increased the dividend from $0.345 per share to the now $0.50 per share, that is a whopping 44.93%! The stock, however, probably doesn't show on dividend investors' radars because the yield is a low 2.03%. But make no mistake about it, this company's board of directors knows how to reward its shareholders though dividends.

Conclusion

This company has turned into one of my favorite stocks of all time, it is a great predictor of how the American economy is chugging along, it operates in an oligopoly, and the board of directors knows how to treat their shareholders. Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates and on short-term earnings growth expectations while next year's earnings estimates have increased. Financially, the dividend is kind of small, but has room to grow, and the financial efficiency ratios have increased since the last earnings report. On a technical basis, I don't really like the risk reward ratio right now. I still like the stock but will not be purchasing any shares at this particular moment and wait more towards the ex-dividend date to pick up some shares.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. 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: The author is long UNP, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.