Formed roughly 150 years ago, Union Pacific (UNP) is one of the most well known railway companies today.  Union Pacific operates through 23 states in the Western United States.  Union Pacific has an infrastructure capable of providing rail freight transportation across the western U.S.  Rail freight is a cheaper, safer and more environmentally friendly way to move goods compared to the trucking industry.

Union Pacific is the nations largest hauler of chemicals and one of the largest in inter-modal freight transportation.  Inter-modal freight is the transport of truck trailers and marine containers.  Railroads provide the infrastructure to transport across the country the nations food, energy, raw materials and consumer goods.  Without this infrastructure in place it would be a lot more challenging and thus a lot more expensive for consumers trying to buy products such as food and  electricity.  Union Pacific is a big part of this industry as it is one of the largest rail operators in the country.

Union Pacific has been going strong for investors who have stuck with them over the long term.  For dividend growth investors, Union Pacific has more recently shown a dedication of paying increasing dividends.  They have managed to pay out an increasing dividend every year for the past 7 years.  Let’s take a look at how an investment in one of the rail freight industries leaders would have fared over the past 10 and 20 years.

A 10 Year Investment in Union Pacific

Let’s take a look and see how you would have fared if you invested $5,000 in Union Pacific stock exactly 10 years ago.  On December 19, 2002 you would have been able to purchase roughly 83 shares of Union Pacific for $4,980 at a closing price of $60.  The most recent closing price of UNP was December 19, 2012 when UNP closed at $125.77.  During this time, UNP had a two for one stock split so that your 83 shares became 166 shares.  Today your 166 shares would be worth roughly $20,877.82 for a return of 319.23% or a compound annual growth rate of 15.41%.

That sounds like a great return over the past 10 years considering the economic conditions faced, however lets not forget about the dividends you would have received during those 10 years as well.  Over the course of the past 10 years you would have received a total of $1,797.78 in dividend income.  This means that your total return over the past decade of owning Union Pacific stock has been 355.33% or 16.37% compounded annually.

So over the past decade while owning Union Pacific shares you have enjoyed a 16.37% compounded annual return.  You have been paid in cash dividends $1,797.78.  You could have used that dividend income to help with some of your expenses such as groceries or utility bills.  Or you could have reinvested those dividend payments and your total return would have been even better.  This has been a great investment if you bought shares of UNP 10 years ago.

A 20 Year Investment in Union Pacific

A 10 year investment in Union Pacific would have turned out great for investors.  How about a 20 years investment?  Lets take a look at how you would have fared had you invested $5,000 in Union Pacific stock 20 years ago.  On December 19, 1992, UNP stock closed with a price of $59.88.  You would have been able to buy 83 shares for a total price of $4,970.  Since that date there has been a 2 for 1 stock split.  Today you would have a total of 166 shares worth a total value of $20,877.82.  This would give you a return of 320% or 7.44% compounded annually.

Once again don’t forget about all the dividend income you would have received over the past 20 years by just owning your Union Pacific shares.  Over the past 20 years you would have received a total of $4,838.07 in dividend income from UNP.  This means that your total return over the past 2 decades of owning Union Pacific stock has been 417% or 8.57% compounded annually.

So a 20 year investment in Union Pacific earned you a total return of 8.57% compounded annually.  You would have received $4,838.07 in dividend income to either offset your expenses or reinvest in the company.  Had you reinvested in more Union Pacific stock your returns would have been even better.

Conclusion

As a dividend growth investor, I would not have considered an investment in Union Pacific until they had shown a history of 5 years worth of dividend increases.  Since they are only at 7 years of annual dividend increases this means I would have only recently added UNP to my possible watch list.  This means that I would have missed out on the decent returns of UNP over the last 20 years and the great returns over the past 10 years.  I am OK with this though because I believe my strategy of dividend growth investing offers the greatest return compared to risk potential. 

This company has shown a commitment to paying increasing dividends over the past 7 years.  I believe railroads offer a great investment in the infrastructure needed to keep this country growing, producing and functioning.  UNP has begun to show a commitment to increasing dividends.  Another railway you may consider investing in is Norfolk Southern which operates in the eastern United States.

I want to point out that I am not taking into account the companies valuation 10 or 20 years ago.  I am merely looking at if you had purchased the stock 10 or 20 years ago.  If the company was overvalued at the time of your purchase, your returns will generally be low.  If the company was undervalued at the the time of your purchase, returns generally will do well.  Valuation at the time of purchase is one of the most important things to take into consideration.  Even a great investment will not turn out great if you pay too much for it.

What do you think?  Do you own Union Pacific stock?  Would you have been happy with these returns over the past couple decades?  Where do you see this company going in the future?

Disclosure: I am long UNP.

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4 Responses to An Investment in Union Pacific

  1. Hey DGI, great post! I think Union Pacific is a great company to add into your portfolio.

    I don’t have any railroad companies in my portfolios, and I sure wish I did! They are slow and steady solid companies that win the day. Just like Monopoly, you got to have them. Lower yield but stable growth. ;)

    I like the basics for UNP, great profit margin and fundamentals. However just like our Canadian railroads, UNP may be trading at it’s peak – just a little too high priced for me. I’d like to come back for this one another day. Norfolk Southern (SNC) may be the better buy in terms of price point.

    All the best over the holidays! and great work on the blog!
    Cheers

    • Dan Mac says:

      Thanks Dividend Ninja. Like you I think UNP might be a little high priced right now. I just picked up my first railroad earlier this month though with some shares of Norfolk Southern. They are a little better priced but have risks with less demand for their coal freight. I think over the long run it will work out well though.

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  3. Dustin Small says:

    Railroad stocks in general are going to do well in the coming years, but UP in particular is a good choice. With fuel prices on the ever increase, moves away from highway freight back to rail will be more prominent going forward.

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