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Union Pacific Stock Up 22% YTD on Cost Cut & Other Factors

Zacks Equity Research

Union Pacific Corporation UNP has been gaining traction from stringent cost-cutting measures. Additionally, the company’s efforts to reward its shareholders through dividends and share buybacks are encouraging.

Owing to these tailwinds primarily, shares of the company have rallied 21.9% so far this year, outperforming the industry’s 19% rise.


Let’s delve into the details.

Union Pacific’s cost-containment moves are driving the company’s bottom line. Evidently, the company’s earnings rose 15% and 12.1% each during the first and the second quarter from 3% and 7% decline in operating expenses in the respective quarters. Moreover, operating ratio (operating expenses as a percentage of revenues), a key measure of efficiency, has improved 2.2 points to 61.6% in the first half of 2019. The metric is expected to improve further in the second half of the year as can be gauged from the fact that full-year operating ratio is expected to be below 61%. Moreover, the same is anticipated to be below 60% by 2020. Notably, lower the value of operating ratio, the better.

Shares of the company have also been on an uptrend owing to its rigorous initiatives to add shareholder value. To this end, the company’s board announced a dividend hike of 10% to 88 cents per share in February. The amount was further raised by 10.2% to 97 cents per share in July. The latest dividend increase marks the fifth such hike since November 2017. As far as buybacks are concerned, the company returned around $5.4 billion to its stockholders through dividends ($1,248 million) and repurchases ($4,148 million) in the first half.

Increase in Industrial freight revenues amid a slowdown in freight demand is another positive, which is believed to have led to an uptick in the company’s shares. Notably, Industrial freight revenues rose 5% to $2.9 billion in the first half of 2019 on the back of higher revenue carloads and a rise in average revenue per car.

Zacks Rank & Key Picks

Union Pacific carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Delta Air Lines, Inc. DAL, Copa Holdings, S.A. CPA and GATX Corporation GATX. While Delta and Copa sport a Zacks Rank #1 (Strong Buy), GATX carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Delta, Copa and GATX have gained more than 16%, 31% and 7% on a year-to-date basis, respectively.

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