Union Pacific Corporationit is (UNP – Free Report) efforts to reward its shareholders through dividends and buybacks attest to its financial strength. However, headwinds such as high operating expenses and lukewarm auto freight revenue are hurting its overall volumes. Currently, the UNP wears a Zacks Rank #3 (Hold).
Let’s dig deeper to find out the UNP’s share of tailwinds and headwinds.
We are bullish on UNP’s ability to generate cash. Cash from operations in 2021 was $9 billion, up 6% year-over-year. Free cash flow increased 8.8% to $3,523 million in 2021. Increased free cash flow supports shareholder-friendly activities at Union Pacific. In 2021, UNP returned $10.1 billion to its shareholders through dividends ($2.8 billion) and buybacks ($7.3 billion).
Union Pacific increased its dividend twice in 2021. In May 2022, UNP increased its quarterly dividend an additional 10% to $1.30 per share. The UNP is also active on the takeover front. In the first quarter of 2022, UNP returned $3.5 billion to its shareholders through dividends and share buybacks. The cash flow conversion rate was 86% in the March quarter. Management expects share buybacks in 2022 to be in line with 2021 levels. Additionally, UNP expects a dividend payout of around 45% (of earnings) in 2022.
With the acceleration of economic activity, freight revenues, which represent the bulk of the company’s turnover, are improving. Cargo revenue increased 11% year-over-year in 2021. In the first quarter of 2022, cargo revenue increased 17% year-over-year. Looking at the segment, freight revenues in the March quarter increased by 21%, 16% and 14% in bulk, industrial and premium units, respectively.
However, at the Wolfe Research Conference, UNP management said overall second quarter volumes were down 3% since the start of the quarter (data as of May 19, 2022). The decrease is mainly due to a 7% drop in volumes in the premium segment.
In addition, the increase in fuel costs due to the increase in oil prices is limiting the growth in net income. In 2021, fuel spend increased 56% year-over-year to $2,049 million at Union Pacific. In the first quarter of 2022, fuel expenses increased by 74%. Rising fuel prices hurt the operating ratio (operating expenses as a % of revenue) by 80 basis points in the March quarter.
The rise in fuel prices and the current operational performance should not allow this key ratio to reach the annual target of 55.5% (set in January). Additionally, weak auto freight revenues are a concern. The shortage of semiconductors is hurting automotive revenues.
Actions to consider
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