In some industries, there isn’t one clear leader. For example, in the retail space you could argue that while Amazon.com, Inc. (NASDAQ:AMZN)appears the clear online leader, Wal-Mart Stores, Inc.(NYSE:WMT) is still the king when it comes to overall sales. However, if investors are looking for the best stock in the railroad industry, there is one leader and then everyone else. I’ve identified at least five different reasons that Union Pacific Corporation (NYSE:UNP) should be an investors first choice in this industry.
They Make More Money:
There are three key numbers I look at whenever I pull apart an earnings report. I look for good revenue growth, good EPS growth, and good operating cash flow growth. Most of the time I have to be pleased if a company can increase two of the three categories, but Union Pacific scores a perfect three for three. The company’s major competition comes from CSX Corporation (NYSE:CSX) and Norfolk Southern Corp. (NYSE:NSC) and to be blunt, they just can’t keep up.
When it comes to revenue growth, Union Pacific increased this measure by 3% in the last quarter. This might not seem too impressive, until you consider that CSX saw revenue decrease 2%, and Norfolk Southern saw a decline of 4%. This top line growth also lead to better EPS performance, with Union Pacific showing a 10% increase. Their competition saw EPS come in flat at CSX, and down 8.45% at Norfolk Southern.
Since EPS can be manipulated, I always check operating cash flow growth. As you might have guessed, Union Pacific outperformed its rivals again. The company was actually the only one of the three to show operating cash flow increase. Union Pacific saw an increase of 4.9% versus declines of 15.61% at CSX, and 5.02% at Norfolk Southern.
Better Performance = Better Dividend Coverage And A Better Balance Sheet
It would be one thing if Union Pacific were generating better earnings and EPS growth by making short-term bets that harmed their balance sheet, or put their cash flow at risk. However, the company is doing the exact opposite. Union Pacific actually shows the best dividend coverage of the three and has the strongest relative balance sheet.
For long-term investors, a reasonable free cash flow payout ratio is essential. The bottom line is, a dividend is really only as attractive as the cash flow that covers the payout. On this score, Union Pacific’s recent payout ratio should make investors very happy. In the last quarter, the company’s free cash flow payout ratio was just 44%. Compared to the over 90% payout ratio at CSX, and the over 75% payout ratio at Norfolk Southern, you can see that Union Pacific shareholders have little to worry about.