Company Description: Union Pacific Corporation operates the largest U.S. railroad, with more than 32,000 miles of rail serving the western two-thirds of the country.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
UNP is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 27.4% premium to its calculated fair value of $129.69. UNP did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
UNP earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. UNP earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1900 and has increased its dividend payments for 14 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $1,131 is below the $2,100 target I look for in a stock that has increased dividends as long as UNP has. If UNP grows its dividend at 10.1% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 2.74%. UNP earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Peers: The company's peer group includes: CSX Corporation (CSX) with a 1.4% yield, Kansas City Southern (KSU) with a 1.0% yield and Norfolk Southern Corp (NSC) with a 2.0% yield.
Conclusion: UNP did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks UNP as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $127.01 before UNP's NPV MMA Differential increased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 2.9%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 12.5%. This dividend growth rate is higher than the 10.1% used in this analysis, thus providing no margin of safety. UNP has a risk rating of 2.25 which classifies it as a Medium risk stock.
UNP's business mix includes agricultural products, automotive, chemicals, coal, industrial products and intermodal. Its free cash flow payout at 48% (down from 44%) and its debt to total capital at 65% (up from 52%). The free cash flow payout is below my desired maximum, while the debt to total capital is above. UNP is trading above my calculated fair value price of $129.69, and its dividend yield is below my current minimum. As such, I will wait for a more opportune time before investing in this company.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in UNP (0.0% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: UNP, CSX, KSU, NSC,
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