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Union Pacific's (UNP) Dividends a Savior, Cost Woes Sting

Union Pacific’s UNP efforts to reward its shareholders through dividends and buybacks attest to its financial strength. However, high operating costs, mainly due to elevated fuel expenses, are hurting its bottom line. Currently, UNP carries a Zacks Rank #3 (Hold).

Let’s delve deeper.

Union Pacific hiked dividend twice in 2021. In May 2022, UNP further upped its quarterly dividend 10%. The railroad operator is also active on the buyback front. In the first nine months of 2022, UNP returned $7.86 billion to its shareholders through dividends ($2.4 billion) and share repurchases ($5.4 billion). Management anticipates share repurchases in 2022 to be $6.5 billion. Additionally, UNP expects a dividend payout of approximately 45% (of earnings) in the long term.

The uptick in overall volumes as labor woes ease is a bonus. In November, management stated at the Stephens 2022 Annual Investment Conference that overall volumes for the December quarter were up 4% (data as of Nov 11) year over year. Segmentwise, volumes at the bulk division were up 1% year over year. Fourth-quarter volumes at the industrial and premium segments are up 4% and 7%, respectively, year over year as of Nov 11.

However, higher fuel costs due to a spike in oil price are limiting bottom-line growth. In 2021, fuel expenses increased 56% year over year to $2,049 million at Union Pacific. In the first nine months of 2022, costs of the same commodity escalated 78%, inducing a 22% increase in operating costs.

Due to high costs and economic uncertainty, the full-year guidance for the operating ratio (operating expenses as a percentage of revenues) deteriorated. A lower value of the metric is desirable. UNP now expects the 2022 operating ratio to be around 60%. Earlier, the expectation was around 58%.

We are also concerned about Union Pacific's high-debt levels. Debt/earnings before interest, taxes, depreciation and amortization (EBITDA) ratio (adjusted) at Union Pacific increased to 2.9 at the end of the first nine months of 2022 from 2.7 at 2021 end. A high debt/EBITDA ratio often indicates a firm’s inefficiency in servicing its debt appropriately.

Stocks to Consider

Some better-ranked stocks within the broader Transportation sector are as follows:

Covenant Logistics CVLG: CVLG offers a portfolio of transportation and logistics services, including asset-based expedited, dedicated and irregular route truckload capacity, besides asset-light warehousing, transportation management and freight brokerage capability.

The gradually improving freight market scenario is a tailwind to Covenant. CVLG’s cost-control efforts are appreciated as well. CVLG currently sports a Zacks Rank #1 (Strong Buy). The stock has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 10.1% upward over the past 60 days.

You can see the complete list of today’s Zacks #1 Rank stocks here.

RyderSystem R: Based in Miami, FL, Ryder provides integrated logistics and transportation solutions. With improved economic and freight market conditions, R is benefiting from higher rental revenues owing to strong demand and favorable pricing. R’s acquisitions of Whiplash and Midwest Warehouse & Distribution System expand its e-commerce fulfillment network and boost multi-client warehousing capabilities. The transactions are expected to drive growth in the supply-chain solutions segment.

Ryder currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for R’s 2022 earnings has been revised 7% upward in the past 60 days.

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Union Pacific Corporation (UNP) : Free Stock Analysis Report

Ryder System, Inc. (R) : Free Stock Analysis Report

Covenant Logistics Group, Inc. (CVLG) : Free Stock Analysis Report

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