Second, Union Pacific is the most efficient railroad based on their operating margin. In the last three months, the company reported a margin of 30.87% versus 29.58% at CSX and 26.6% at Norfolk Southern Corp. (NYSE:NSC). A higher margin theoretically should produce more cash flow, which in turn can be used for dividends or share repurchases.
Third, Union Pacific has the lowest free cash flow payout ratio of their peer group. However, investors need to be careful of how they calculate this ratio. It used to be that the cash flow statement was an easier way to tell how a company was really doing. While earnings could be manipulated, cash flow is less easy to change. The problem is many times companies are recording huge changes to their assets and liabilities that may or may not be real cash. To avoid this issue, I use something I call core free cash flow.
Core free cash flow is simply a company’s net income, plus depreciation, minus capital expenditures. Using this measure, CSX’s core free cash flow payout was 60.08% in the last quarter. By comparison, Norfolk Southern Corp. (NYSE:NSC) actually had a negative core free cash flow payout, and Union Pacific used 53.04% of their core free cash flow. With the lowest payout ratio, Union Pacific may be able to increase their dividend more easily than their peers.
Last but not least, investors should consider Union Pacific’s stronger balance sheet as a potential reason to buy the stock. While in some measures the company barely beats their competition, if we look at Union Pacific’s debt-to-equity ratio, this is no contest. The company’s debt-to-equity ratio of 0.46 is significantly less than Norfolk Southern Corp. (NYSE:NSC) at 0.86, or CSX at 0.95. With relatively less debt versus their peers, Union Pacific has more flexibility to increase the dividend, buy back shares, or make earnings accretive acquisitions.
As you can see, whether it’s better margins, free cash flow, or a stronger balance sheet, Union Pacific beats them all. Investors are being paid a yield of just under 2%, and analysts expect strong earnings growth of over 14% in the next few years. What better way to keep up with the economy, than to buy shares in the railroad that is at the top of its class?
The article There Is No One Better in This Industry originally appeared on Fool.com and is written by Chad Henage.
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