Income investors seek a steady stream of dividends to fund their lifestyle and retirement. That’s why we review dividend stocks every day. The company we’re covering in this article is down over 5%. However, Union Pacific’s (NYSE: UNP) dividend history is long, so let’s take a look at the business, dividend history and dividend safety.
Union Pacific Business Overview and Highlights
Union Pacific is in a lucrative industry. It’s a railroad company, and Warren Buffett has invested billions into railroads due to their consistent cashflows. This consistency helps Union Pacific maintain a credit rating of A-. It also helps the company issue cheap debt to expand operations and finance other initiatives.
Union Pacific is based out of Omaha, Nebraska and employs 42,000 people. Last year, Union Pacific pulled in $21 billion in sales, which breaks down to $506,000 per employee. Union Pacific is valued at $105 billion by investors.
One notable past acquisition was Southern Pacific. This, along with other smaller regional acquisitions, has helped make Union Pacific one of the largest freight railroad companies in the world.
Union Pacific Dividend History 10-Years
Union Pacific paid investors $0.49 per share a decade ago. Over the last 10 years, the dividend has climbed to $2.48. That’s a 406% increase! You can view the annual changes below.
The compound annual growth is 17.6% over 10 years… but over the last year, Union Pacific’s dividend climbed 10%. The slowdown in dividend growth isn’t a great sign. However, Union Pacific still might be a good income investment. Let’s take a look at the yield.
Current Yield vs. 10-Year Average
Union Pacific’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and we’ll look at that soon.
The dividend yield comes in at 2.24%, which is below the 10-year average of 2.29%. The chart below shows the dividend yield over the last 10 years.
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean-reverting with share price changes.
Improved UNP Dividend Safety Check
Many investors look at payout ratio to determine dividend safety. To do this, they look at the dividend per share divided by the net income per share. So a payout ratio of 60% would mean that for every $1 Union Pacific earns, it pays investors $0.60.
Payout ratio is a good indicator of dividend safety… but accountants manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Union Pacific’s payout ratio based on free cash flow over the last 10 years.
The ratio is volatile over the last 10 years and the trend is up. The last reported year shows a payout ratio of 49.6%. This gives plenty of room for Union Pacific’s board of directors to raise the dividend.
Overall, Union Pacific’s dividend looks safe for now. However, the dividend yield is just below the 10-year average. There are dividend stocks with higher yields. You might want to shop for better dividend stocks in the current market.
If you’re interested in seeing more dividend research, please comment below. You can also check out our free dividend reinvestment calculator.
Good investing,
Robert
