Union Pacific: Get on Board

04/18/2016 7:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Our latest featured recommendation operates the largest US railroad, with a network that spans 32,000 route miles, linking Pacific Coast and Gulf Coast ports to Midwest and eastern gateways, asserts Ian Wyatt, editor of High Yield Wealth.

If you like economic moats, you have to like Union Pacific (UNP). The US rail industry has an oligopoly-like structure, with over 80% of revenues generated by the four largest railroads.

This structure has enabled Union Pacific to grow net income 297% over the past 10 years.

As for the dividend, that grows, too. In fact, it's grown to an annual $2.20 per-share payout that produces a 2.8% dividend yield. That's the highest yield since the 2009 recession.

This time last year, Union Pacific shares were changing hands at $120 each. Today they're changing hands at $79 each. That's a 33% discount. 

No company's shares go on sale for no reason. Lower volume across many of Union Pacific's rail categories has sent many investors to the exits.

Fourth-quarter numbers were particularly disappointing. Carload volume was down in five of six commodity categories that comprise Union Pacific's business.  Coal and industrial products led the charge lower.

Why consider Union Pacific now? Current low expectations are priced into Union Pacific shares. When expectations are low, the slightest morsel of positive news is enough to move the share price higher.

Union Pacific invested roughly $33 billion from 2006 to 2015 in its network and operations. It also embarked on a multi-year campaign of streamlining that has made it one of the most cost-effective railroads in the United States.

Union Pacific is cheap; its shares trade at only 14.5 times trailing 12-month earnings of $5.49 per share. This is compared to the 18.2 average multiple in the rail industry.

Twelve months from now we easily see Union Pacific trading at $90. That price might even be conservative. Overall, Union Pacific is a first-rate dividend grower, and it's on sale.

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By Ian Wyatt, Editor of High Yield Wealth

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