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Why This Railroad Stock’s the Best Benchmark on the U.S. Economy

By Mitchell Clark | Small Business

Why This Railroad Stock’s the Best Benchmark on the U.S. Economy image 180913 PC clarkWhy This Railroad Stock’s the Best Benchmark on the U.S. EconomyNext month, one of my favorite benchmark stocks reports its third-quarter earnings. The company is Union Pacific Corporation (UNP), which is a great barometer on the U.S. economy.

The stock’s been in consolidation since May, and rightly so. This company has been going up in value on the stock market since 2000 with a major hiccup during the most recent financial crisis.

During its March low in 2009, the company was trading around $35.00 a share. Now it’s near $160.00 a share, not including dividends (current dividend yield is approximately two percent).

The railroad business is a mature and slow-growth area; but real economic growth is a tough thing to come by these days, and Union Pacific has been delivering the goods.

Last year, the company’s revenues were about $21.0 billion; in 2011, they were $19.6 billion and in 2010, revenues were $17.0 billion. Earnings were $3.9 billion in 2012, $3.3 billion in 2011, and $2.8 billion in 2010.

So while the growth is relatively unexciting, it’s still decent when combined with dividend increases. The marketplace has proven over the last few years that you can make great money on the stock market with dividend-paying, old economy names.

I think this trend will still be valid throughout 2014. The stock market is still a very risky place, and investment risk is high for equities. This is why institutional investors are sticking with the safest, dividend-paying names. In my view, Union Pacific is one of these names, and the company’s outlook remains sound.

This year, Wall Street expects Union Pacific to grow its earnings some 15%. Total sales growth for the year is currently expected to be 5.9%.

The company’s shares, in my view, are appropriately valued with a trailing price-to-earnings (P/E) ratio of approximately 17.8 and a forward P/E ratio of 14.3, according to Thomson Reuters.

The last time the company split its shares was in May of 2008 (two for one). It’s due for another share split any time now. (See “Strong Cash Flow, Increasing Dividends Make This Old Economy Stock Attractive.”)

In the first three quarters of this fiscal year, Union Pacific paid a dividend of $0.69 a share. Its next quarterly dividend, to be paid on October 1, 2013, will be a substantial increase at $0.79 a share.

A rising stock like Union Pacific, combined with increasing dividends, compounds wealth for stockholders. This is especially the case if those dividends are reinvested in new shares.

I think any long-term equity portfolio should have some exposure to the railroad business. It is old economy, but the business of freight is still a good business to be in and rail works very well.

The company is expected to report its third-quarter earnings on October 17, 2013. Analysts haven’t budged from their current consensus of $2.56 a share.

Union Pacific has a history of delivering on expectations, and I think the third quarter will be another good one for the company. I wouldn’t expect another dividend increase this year, but a share split would please the market.

Union Pacific is a worthwhile company to consider when it’s down. Generally speaking, railroad stocks are always worth following in terms of stock market dynamics and for individual stock selection.

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