The transportation {industry} is extremely delicate to tariffs. Tariffs can have an effect on freight prices, disrupt provide chains, and decrease commerce volumes.
Union Pacific (UNP -0.75%) is likely one of the largest railroads in North America. With a concentrate on the western two-thirds of the U.S., it additionally connects to Canada’s rail programs and serves all six main Mexico gateways.
On paper, Union Pacific might seem like extremely delicate to commerce tensions. Nevertheless, the corporate reported good earnings in its most up-to-date quarter and held its prior steering regular throughout a interval when many corporations are slashing their forecasts.
Here is why Union Pacific stays a well-rounded dividend inventory to purchase now.
Picture supply: Getty Photos.
Reaffirmed steering
Union Pacific noticed a 4% enhance in first-quarter 2025 freight revenues, however a 15% gas surcharge and different components led to flat general working revenues.
Union Pacific breaks down its freight income into three key classes — bulk, industrial, and premium. Every section makes up roughly a 3rd of whole freight income.
Bulk is primarily composed of grains, grain merchandise, coal, and renewables, with a lesser amount of fertilizers, meals, and refrigerated merchandise.
Industrial consists of metals, minerals, industrial chemical substances, plastics, power, specialised markets, and forest merchandise.
The premium section primarily focuses on transporting merchandise in intermodal containers and, to a lesser extent, transporting vehicles and automotive components.
Within the first quarter, bulk income was up 1%, industrial was down 1%, and premium was up 5%.
On Union Pacific’s January earnings name, administration was optimistic that the automotive market would enhance all year long and home intermodal could be a brilliant spot. Nevertheless, on the April earnings name, administration mentioned that automotive is susceptible to tariff uncertainty and that it expects a slowdown in worldwide intermodal. Union Pacific expects decrease meals and beverage, petroleum, automotive, and worldwide intermodal volumes and flat coal volumes, however larger grain and grain merchandise, industrial chemical substances, plastics, and home intermodal volumes.
All informed, administration remained assured within the general enterprise efficiency as a consequence of robust carloads and a diversified mixture of shipments. Union Pacific expects earnings per share to be according to its three-year compound annual progress fee goal of excessive single to low double digits, an industry-leading working ratio and return on invested capital (ROIC), a capital plan of $3.4 billion, and share repurchases of $4 billion to $4.5 billion. Nevertheless, within the first quarter, diluted earnings per share (EPS) had been up lower than 1%,so Union Pacific may have some work to do for the remainder of the 12 months if it desires to hit its goal.
Aggressive benefits
Union Pacific is well-equipped to succeed even throughout a interval of upper tariffs, because of its extremely diversified product combine and low working prices. Union Pacific reaffirmed its industry-leading working effectivity and ROIC. A better working margin — which is the share of working revenue to whole income — implies larger profitability after accounting for all working bills. Equally, a larger ROIC signifies an organization is managing its debt and fairness capital nicely to generate earnings.
During the last decade, Union Pacific has persistently maintained excessive 30% to low 40% working margins and round a 14% ROIC even because it has grown income. As you may see within the following chart, Union Pacific’s income dipped through the pandemic, however then surged previous pre-pandemic ranges and has stayed excessive ever since.
UNP Income (TTM) information by YCharts.
Railroads profit from financial progress, however they are not as cyclical as different components of the transportation {industry}, like package deal supply corporations, for instance. It is because the primary bills for railroads are sustaining the rail community, bettering the community, labor, and gas — all of that are pretty predictable within the brief time period.
On account of its extremely diversified product combine and long-term contracts and quantity commitments, demand is unlikely to fluctuate considerably even throughout financial slowdowns. For instance, think about that working income fell simply 10% in 2020, and working revenue fell 8%. That is spectacular contemplating the pandemic-induced financial slowdown in a number of of Union Pacific’s finish markets.
A powerful capital return program
Excessive margins assist a rising capital return program. In Q1, Union Pacific paid $804 million in dividends and spent $1.42 billion on inventory repurchases. It was an outsized quarter for inventory buybacks contemplating Union Pacific plans to repurchase $4 billion to $4.5 billion in inventory for the complete 12 months, which might be round $1 billion to $1.13 billion per quarter. In the course of the earnings name, the corporate acknowledged that it made open-market purchases of an extra $220 million, making the most of “very engaging share costs.” This implies administration is assured that the inventory is attractively valued regardless of a possible commerce battle.
Union Pacific can afford its sizable capital return program because of its extremely worthwhile enterprise mannequin. The corporate persistently sports activities a sub-50% payout ratio, which is superb. Since dividends make up lower than half of earnings, Union Pacific has room to make buybacks with out straining its steadiness sheet.
Union Pacific has continued to lift its dividend, however its inventory value has remained stagnant, which has pushed its dividend yield to 2.5%. Earnings progress has additionally led to a decrease valuation, with the price-to-earnings ratio falling beneath 20 — a very good worth for such an industry-leading railroad.
A high-conviction purchase for passive revenue buyers
Union Pacific’s newest earnings name showcased administration’s confidence within the firm’s potential to soak up or go alongside tariff-related prices. Whereas Union Pacific is not resistant to financial slowdowns, it has an impeccable monitor document of delivering robust outcomes even throughout difficult durations, as evidenced by modest declines through the pandemic.
Union Pacific is a superb worth, and it has a very good dividend yield as nicely. It is a dependable possibility for passive revenue buyers in search of an organization they will rely on, even when tariffs persist.
