Strong Cash Flow, Increasing Dividends Make This Old Economy Stock Attractive

Submitted by Profit Confidential as part of our contributors program

Blue chips across the board have been taking a break, along with the rest of the stock market. But in my mind, their leadership remains intact, and so does the performance of the Dow Jones Transportation Average.

This index recently broke below its 50-day simple moving average (MA), but this is very normal and not a trendsetting event. Many component stocks have been on fire all year and are due for a sustained period of retrenchment.

One component company that I continue to like is Union Pacific Corporation (UNP). The railroad sector is old economy, but it’s still a solid gauge on domestic economic activity. Plus, Union Pacific is a solidly profitable company that provides growing dividends to shareholders. The stock is currently yielding 2.1%.

Perusing the company’s regulatory filings, what stands out is Union Pacific’s strong financial recovery from 2009, when business operations experienced a pronounced downturn. Of course, we’re dealing with a very mature blue chip company, so financial growth isn’t like a small-cap technology stock. But the company really did turn its financial metrics around in a diligent manner, and the results are evidenced in its share price performance.

Chart courtesy of www.StockCharts.com

Union Pacific’s operating revenues dropped significantly from $18.0 billion in 2008 to $14.1 billion in 2009. But the recovery was swift, as 2010’s operating revenues came back up to $17.0 billion, followed by $19.6 billion in 2011 and $20.9 billion last year.

Notable in the company’s economic recovery was its earnings and dividend payments to shareholders.

Earnings in 2009 fell to $1.89 billion from $2.3 billion in 2008. They recovered commensurately with revenues to $2.8 billion in 2010, $3.3 billion in 2011, and $3.9 billion in 2012.

Dividends per share also accelerated, even through the 2009 down year, while the company’s debt-to-capital ratio fell consistently since 2009 and return on average shareholders’ equity improved substantially.

It’s this track record of financial success and recovery from the significant downturn that stands out as a major selling feature for Union Pacific. Every company experiences its own business cycle, and a diligent management team along with increased dividends kept investors interested in this stock.

The year 2012 was a record operating performance year for Union Pacific, and even if there is no full-year volume growth this year, company management still expects 2013 earnings to exceed those of 2012. From my perspective, these expectations are worth owning.

Railroad stocks aren’t for everyone, but as part of a long-term equity portfolio of blue chips, I think a railroad company should be included.

A stock like Union Pacific is the kind of enterprise that you watch and keep an eye on, perhaps on a monthly basis, looking for opportune times to consider new positions. I’m not an advocate of buying this market currently—it’s already gone up and certainty regarding monetary policy is in flux. (See “Why Corporate Earnings Are Taking a Back Seat to the Fed.”

Union Pacific recently increased its dividend again by 14.5%, or $0.10 per share, to $0.79 quarterly. Strong cash flows and other solid financial metrics continue to make this company an attractive security for long-term portfolios.