Union Pacific Corporation (UNP): High Dividend Growth and a Durable Moat

Union Pacific’s stock also returned -23% in 2008, which outperformed the S&P 500 by 14%. While cyclical companies score lower for Dividend Safety, Union Pacific fared reasonable well during the last recession, all things considered.

Free cash flow is one of the most important financial metrics to understand for successful dividend investing. Without free cash flow, a company cannot sustainably pay dividends. As seen below, Union Pacific has generated consistent free cash flow. While railroads require substantial capital to build and maintain, they throw off a lot of cash. As Union Pacific continues increasing prices and investing in more efficient operations, cash flow generation should remain strong to support the dividend.

Union Pacific has steadily improved its return on invested capital over the last decade. The company’s stable returns in the mid-teens suggest that it has an economic moat and enable it to compound its earnings faster than other lower-returning businesses. A relatively high and stable return can also indicate that a company’s dividend payment is of higher quality.

Reviewing a company’s balance sheet is also essential to assess dividend safety, especially for macro-sensitive stocks. Companies will always make interest and debt payments before paying a dividend.

Union Pacific’s financial leverage looks reasonable. As seen below, the company could cover its entire net debt with cash on hand and just 1.6 years’ worth of earnings before interest and taxes (EBIT). Union Pacific also maintains investment grade credit ratings.

Overall, Union Pacific appears to have one of the safest dividend payments in the market. The company has healthy payout ratios, generates predictable free cash flow, and has demonstrated an excellent ability to pullback on costs when times get tough.