Union Pacific: Dividend Growth Analysis For Long-Term Investors

| About: Union Pacific (UNP)

Union Pacific (NYSE:UNP) traded ex-dividend on 5/29/2012 with a payout of $0.60 per share. This is a 26.32% increase over the $0.475 dividend paid in the same quarter last year. Based on an annualized dividend payout of $2.40, my yield on cost is currently 2.27% at my average share purchase price of $105.94.

Union Pacific's dividend compound annual growth rate has been accelerating over the last 10 years, with the expected payout in 2012 increasing at a compound rate of 24.35% over 2011. This is lower than the 3 and 5 year dividend CAGR, but very respectable nonetheless. The following table outlines the annual dividends paid since 2002, along with the 10, 5, 3, and 1 year dividend CAGR. An easy to use compound annual growth rate calculator can be found here.

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Annual Dividend Paid 0.42 0.50 0.60 0.60

0.60

0.75 0.98 1.08 1.31 1.93 2.40*
CAGR Growth Rates 10 YR 5 YR 3 YR 1 YR
19.04% 26.19% 30.50% 24.35%
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*Indicated dividend for 2012.

Since 2002, annual dividends increased 8 times and remained unchanged in 2005 and 2006. Despite not growing dividend payouts for two years, UNP has delivered an impressive dividend growth rate of 19.04% over the last decade. The current payout ratio is a comfortable 28% based on the 2012 analyst EPS mean estimate of $8.59.

Union Pacific has also exhibited strong earnings growth over the last 5 years at a compound annual rate of 19.95%. Analyst estimates for growth over the next 5 years is 16.30%, which is a decline of roughly 18.30%. Taking the 10-year dividend CAGR as a basis, the following table estimates the yield on initial investment and EPS through the next 20 years. An 18.30% reduction is made in EPS estimates for years 1-5, with each five years after year 5 receiving an additional 18.30% reduction. Dividend growth rates are reduced at a similar rate with a five-year lag behind EPS decline.

20-Year Growth Analysis at 10-Year Dividend CAGR

YEAR ANNUAL DIVIDEND EST. EST. DIVIDEND GROWTH RATE YIELD ON INTIAL COST CUMULATIVE DIVIDENDS PAID CUMULATIVE DIVIDEND RETURN EPS EST. EST. EPS GROWTH RATE PAYOUT RATIO
NOW $2.40 2.27% $8.59 27.94%
1 $2.86 19.04% 2.70% $5.26 4.96% $9.99 16.30% 28.60%
2 $3.40 19.04% 3.21% $8.66 8.17% $11.62 16.30% 29.27%
3 $4.05 19.04% 3.82% $12.71 11.99% $13.51 16.30% 29.96%
4 $4.82 19.04% 4.55% $17.53 16.54% $15.71 16.30% 30.67%
5 $5.74 19.04% 5.42% $23.26 21.96% $18.28 16.30% 31.39%
6 $6.63 15.56% 6.26% $29.89 28.22% $20.71 13.32% 32.01%
7 $7.66 15.56% 7.23% $37.55 35.45% $23.47 13.32% 32.64%
8 $8.85 15.56% 8.36% $46.40 43.80% $26.59 13.32% 33.29%
9 $10.23 15.56% 9.66% $56.63 53.46% $30.14 13.32% 33.94%
10 $11.82 15.56% 11.16% $68.46 64.62% $34.15 13.32% 34.62%
11 $13.32 12.71% 12.58% $81.78 77.19% $37.87 10.88% 35.19%
12 $15.02 12.71% 14.17% $96.80 91.37% $41.99 10.88% 35.77%
13 $16.93 12.71% 15.98% $113.72 107.34% $46.55 10.88% 36.36%
14 $19.08 12.71% 18.01% $132.80 125.35% $51.62 10.88% 36.96%
15 $21.50 12.71% 20.30% $154.30 145.65% $57.24 10.88% 37.57%
16 $23.73 10.38% 22.40% $178.03 168.05% $62.32 8.89% 38.08%
17 $26.20 10.38% 24.73% $204.23 192.78% $67.87 8.89% 38.60%
18 $28.92 10.38% 27.30% $233.15 220.08% $73.90 8.89% 39.13%
19 $31.92 10.38% 30.13% $265.07 250.21% $80.47 8.89% 39.67%
20 $35.24 10.38% 33.26% $300.31 283.47% $87.62 8.89% 40.22%
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The analysis shows an investor may expect a yield on cost of 33.26% at year 20. This certainly seems reasonable as UNP's estimated payout ratio is only 40.22%. An investor can also expect to receive $300 per share in total dividends paid out over the 20-year period. This is 2.83 times the initial share price paid for the investment. Also note that UNP hits a 10-year target many dividend growth investors use of 10% yield on cost. The calculated 20-year dividend CAGR is 14.38% for this analysis. A similar analysis can be performed at the more aggressive 5-year dividend CAGR of 26.19%. The results are shown in the following table.

20-Year Growth Analysis at 5-Year Dividend CAGR

YEAR ANNUAL DIVIDEND EST. EST. DIVIDEND GROWTH RATE YIELD ON INTIAL COST CUMULATIVE DIVIDENDS PAID CUMULATIVE DIVIDEND RETURN EPS EST. EST. EPS GROWTH RATE PAYOUT RATIO
NOW $2.40 2.27% $8.59 27.94%
1 $3.03 26.19% 2.86% $5.43 5.12% $9.99 16.30% 30.32%
2 $3.82 26.19% 3.61% $9.25 8.73% $11.62 16.30% 32.89%
3 $4.82 26.19% 4.55% $14.07 13.28% $13.51 16.30% 35.69%
4 $6.09 26.19% 5.74% $20.16 19.03% $15.71 16.30% 38.73%
5 $7.68 26.19% 7.25% $27.84 26.28% $18.28 16.30% 42.02%
6 $9.32 21.40% 8.80% $37.16 35.08% $20.71 13.32% 45.02%
7 $11.32 21.40% 10.68% $48.48 45.76% $23.47 13.32% 48.23%
8 $13.74 21.40% 12.97% $62.22 58.73% $26.59 13.32% 51.66%
9 $16.68 21.40% 15.74% $78.90 74.47% $30.14 13.32% 55.35%
10 $20.25 21.40% 19.11% $99.15 93.59% $34.15 13.32% 59.29%
11 $23.79 17.48% 22.46% $122.94 116.04% $37.87 10.88% 62.83%
12 $27.95 17.48% 26.38% $150.88 142.42% $41.99 10.88% 66.57%
13 $32.83 17.48% 30.99% $183.72 173.42% $46.55 10.88% 70.53%
14 $38.57 17.48% 36.41% $222.29 209.83% $51.62 10.88% 74.73%
15 $45.32 17.48% 42.78% $267.61 252.61% $57.24 10.88% 79.18%
16 $51.79 14.28% 48.89% $319.41 301.50% $62.32 8.89% 83.10%
17 $59.19 14.28% 55.87% $378.60 357.37% $67.87 8.89% 87.22%
18 $67.65 14.28% 63.85% $446.24 421.22% $73.90 8.89% 91.54%
19 $77.31 14.28% 72.97% $523.55 494.20% $80.47 8.89% 96.07%
20 $88.35 14.28% 83.40% $611.91 577.60% $87.62 8.89% 100.83%
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Using the more aggressive historical 5-year dividend CAGR of 26.19%, we can expect a yield on cost of 83.40%, but the payout ratio hits 100%. It is unlikely Union Pacific will be in a state of business that allows it to payout 100% of earnings as dividends in 20 years. The calculated 20-year dividend CAGR is 19.76% for this analysis. Some value may be found in this analysis at the 10-year mark. If UNP were to double it's payout ratio over the next decade, an investor could expect to receive a yield on cost of 19.11%. This may be about as reasonable an assessment we can make for this analysis as the estimates quickly start breaking down after year 10. Needless to say, estimating future cash flows when starting out at an increased level of dividend growth is extremely difficult.

With a strong dividend CAGR over the last decade, a most recent quarter-over-quarter dividend increase of 26%, and strong earnings growth, Union Pacific passes the dividend test and will continue to be a core position is my dividend growth portfolio.

Disclosure: I am long UNP.