Union Pacific Strong on Dividends Despite Freight Downturn

Union Pacific’s UNP efforts to reward its shareholders through dividends and buybacks are encouraging. However, soft freight revenues are concerning as they are hurting growth.

UNP is focused on rewarding its shareholders. Strong free cash flow supports the shareholder-friendly activities at Union Pacific. Free cash flow in 2023 was $1.54 billion. In 2023, the company returned $3.9 billion to its shareholders. Union Pacific hiked dividends twice in 2021. In May 2022, UNP upped its quarterly dividend by a further 10% to $1.30 per share. In July 2024, UNP increased its dividend by a further 3% to $1.34 per share. The company has paid dividends on common stock for 125 consecutive years, reflecting its pro-shareholder approach. Management resumed buying back shares in the second quarter of 2024. UNP bought back shares worth $1.5 billion in 2024.

U.S. equity markets have been experiencing extreme volatility lately, largely due to escalating trade tensions. Stocks have been tumbling on fears of a recession as uncertainty grows over President Trump’s tariff policies. In view of the prevalent uncertainties surrounding the economy and the rise in inflation over the past few months, the railroad industry is likely to suffer.

As it is, Union Pacific is suffering big time due to a decline in volumes as a result of soft consumer markets. Geopolitical uncertainty and high inflation continue to hurt consumer sentiment. To combat the revenue weakness due to the freight downturn, UNP is looking to cut costs to drive the bottom line. To improve efficiency, UNP is using longer trains, boosting freight car velocity. Due to the cost-cut efforts, operating expenses declined 3% year over year in 2024.

Shares of Union Pacific have gained 2.6% so far this year, outperforming the Zacks Transportation – Rail industry’s 1.5% decline.

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With consumer spending and business investments remaining low, production levels have decreased in response to reduced demand. As a result of low demand, there is less need for transportation services to move goods, resulting in a freight recession. Below-par freight rates are also hurting UNP’s prospects.

Due to low revenues, the operating ratio (operating expenses as a percentage of revenues) at UNP increased 220 basis points to 62.3% at the end of 2023 from the 2022 reading. Operating ratio is likely to deteriorate i.e. increase, since a lower value of the metric is preferable, going forward due to the costs associated with the recently inked labor deals. Geopolitical uncertainty and high inflation continue to hurt consumer sentiment. Reduced fuel surcharge revenues, too, are a concern.