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Union Pacific: Rewarding Shareholders Without High Revenue Growth

Eric Sprague profile picture
Eric Sprague


  • Train lengths have gotten longer such that Union Pacific operates more efficiently.
  • The operating ratio has come down nicely from 84% in 2000 to 60% in 2020.
  • Shareholder returns since the year 2000 have been excellent despite limited growth in top line revenue.

Hauling the freight

haveblue/iStock via Getty Images


My thesis is that Union Pacific (NYSE:UNP) shows how to have excellent shareholder returns without prodigious revenue growth. Revenue for 2000 was nearly $11.9 billion and 20 years later it was a little over $19.5 billion for a CAGR of just

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Eric Sprague profile picture
I'm an individual investor heavily influenced by Warren Buffett and Charlie Munger. Munger's 1994 USC Business School Speech is something I think about a lot: ### Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result. ... Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you're going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15%—or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work. ### Feel free to follow me on twitter: https://twitter.com/ftreric

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UNP, BRK.A, BRK.B, VOO either through stock ownership, options, or other derivatives. 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.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (32)

Nailed it with this article!
Big Fat Dummy profile picture

Nice article - appreciated analysis.

For your knowledge, I think you have two substantive errors:

In the train length section, you wrote, “The 2020 10-K shows that the average overall train length went up 10% from 7,036 feet in 2018 to 7,747 feet in 2019 and up another 14% to 8,798 feet in 2000.”

Should this not be 8,798ft in 2020?

Additionally, you wrote, “Compensation and benefits dropped from 36% of revenue in 2000 when there were 50.5 million employees to 20% of revenue in 2020 when there were 31 million employees.”

I think you are off by a significant factor here. Perhaps you meant 50,500 employees?
Eric Sprague profile picture
Thanks, @Big Fat Dummy! I submitted a correction request.
@Big Fat Dummy UNP runs trains in excess of 10,000 feet on a regular basis, so the "average" is most likely a bogus number to make it look like they aren't running such long trains, but if you ask anyone that actually works on the trains, or lives anywhere along one of their routes, they will tell you the "average" is a bunk number to say the least.
Believe the numbers of employees listed for the rail industry is overstated, be it the U.S. or North America in total. Sour grapes in the comments reflect extremely poor handling of the SP merger by the seniors back in the day. Those folks are long gone. Plus, the "family friendly" management style has been replaced with a Walmart or Amazon model over the last decade. Such is progress, and I'm glad to have retired.
09 Oct. 2021
@Mazzuchelli1 Union Pacific has fired thousands of workers in the last 2 years to cut costs. They have also been slacking on safety measures. Derailments are up massively over the last several years aswell.

Amazon and Walmart are the perfect companies to compare Union Pacific to. Management will happily gut the company for a quick buck.
Conscentatio Excellentiae profile picture
@Izet Welcome to corporate America. They are all the same.
Eric Sprague profile picture
Fuel efficiency has gone up nicely. The 2000 fact book shows 485,000 million RTMs and if we divide that by the 1,293 million gallons consumed then we get 375.1 RTMs/gallon. By 2020 this went up to 453.5 RTMs/gallon seeing as that’s the 385,000 million RTMs from the 10-K divided by the 849 million gallons consumed from the building America report.
Longer trains are great if one is making $ from them, but if one lives anywhere one of these 3 mile hunks of garbage is running, good luck not having crossings blocked for miles with no way to clear them for emergency services.
I read that there are law firms across the country collecting data about this very thing and I suspect there will be a class action coming soon.

UNP has fired everyone that knew anything about railroading and are collossally failing everyday and then patting themselves on the back for a job well done.

Week 37 carloadings are around 155k and last year in the height of covid, they were 160k, so continuously declining carloadings, along with fewer customers doesn't exactly sound like winning, especially given that shipping has never made so much money as now.

The BN is eating UNP's lunch and the new CPKCS will most likely consume even more of UNP.

UNP is treating there train crews like truck drivers, but must not realize that trucking has sky high turnover rates, but maybe that's the goal, to make all the remaining employees quit.

Either way, I used to buy UNP every month, but wouldn't hold it even if it was given to me.

Some people will do anything for a quick buck, and then there are those of us with morals.

@WhenUknowUknow ANOTHER Good reason for Congress to get the Infrastructure Bill passed and more "strategically" placed RR Over-Pass (or road Under-Pass) construction hearings to take place where those selfless Law-Firms data could be put to use. . . . , For a Fee, I assume. Long Rails, $UNP, $BRK.B, in agreement with the author @Eric Sprague
@Hugh Arhue The Republicans along with their puppet, Manchin already stripped the infrastructure bill of the 2 person crew requirement and any remaining bill will most assuredly be gutted of any meaningful provisions that protect jobs or public safety.
@WhenUknowUknow Thanks for the heads up. Well, I guess one can infer the Republicans are embracing the "Autonomous" revolution going on in motorized transportation? 5G/6G? . . . , Of course as long as it does not endanger the public.
RE: Your "The operating ratio has come down nicely from 84% in 2000 to 60% in 2020." Put this in context. SP's OR in the first half of the 1990s was 99% to 104% while its subsidiary SSW's OR was in the low 60s percent. SP in San Francisco didn't see the future, couldn't "rail only" itself to profitability, was rejected at SFSP and sold off to D&RGW, and ended up at UP. Took 'nearly' 2 decades for UP to digest that high OR genie and forever replace it with a sub-60 OR genie. From 104% to 55%. Raise your hand if you're a former SP engineer/conductor who understands putting genies back into a bottle.
I enjoyed reading your article. We have owned $UNP since 2016. We enjoy collecting $UNP dividends. $UNP is a long term hold. A great company.
2000? i mean certainly a historical perspective, but UNP has been a beast for sure. Look at that dividend growth as well.
Solid company UNP, best of breed in its sector.
Long Time Running profile picture
I would like to see a comparison with CN, a PSR veteran from 15 years ago.

Ruest, who is being challenged by TCI, an activist shareholder, has focused on growing the company versus concentration on the OR.

CN has an OR in the 60s versus peers and apparently that is not good enough.

Who will win, I wonder?
Excellent piece, Eric. Just as you say, it illustrates how terrific shareholder returns can be realized even with slow revenue growth. Only wish you said more about UNP compared to BNSF on a few operating metrics. I believe BNSF has lagged some-- would love to see more analysis on this. Next column?
Eric Sprague profile picture
Thanks, @benjamin k! I'm interested in the way they compare with BNSF and there is a good chance I'll write about that at some point.
The lenght of trains has proven to be a boon for efficiency --but looking it another way the the extended length has to cause wear on track?
Long Time Running profile picture
@rado403 , no, trains are maxed out and consequently they run slower which is less wear on curves and turnouts. They actually save on time by having to stop less frequently.

And with distributed power, braking is mostly done with dynamic (engine) braking so there is less wear on track and equipment.

In train forces (buff and draft) are more controlled and air pressure is maintained with less taper even in cold weather.

Saves fuel too.
@rado403 The same amount of cars are going over the tracks, just fewer trains
@Long Time Running TY Train Magazine recent had a very good article on rail wear!
Buyandhold 2012 profile picture
I recently bought it.
Conscentatio Excellentiae profile picture
I would like to invest in UNP today but am concerned about where future efficiency gains will come from to drive increased profit. Some say electric trains but that might be a long way off. I prefer CSX except for the dividend which I need. Like CSX, I’d like to see some form of diversification.
@Conscentatio Excellentiae WAB is working on both electric and Hydrogen locos
UNP has been one of my top performing investments since I initiated a position about two decades ago.
Eric Sprague profile picture
Congrats, @Dr. LouX!
Money&Money,LLC profile picture
Started buying at $197.
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