It’s pretty clear that investors have stepped away from the stock market, either sitting on the sidelines or not participating at all in new positions. This market looks tired, directionless, and generally displeased with the current state of things. The earnings picture is modest, but corporate balance sheets are strong. There’s the potential for a new business cycle, but a lot of things have to change in order for this to happen. It’s low and slow for the foreseeable future.
As part of a series in this column, I’d like to highlight an “old economy” company that’s proven to be a solid wealth creator on the stock market. This company has a history of increasing dividends to shareholders (one recent dividend increase was huge), as well as generating solid earnings growth and a track record on the stock market that’s very admirable.
Union Pacific Corporation (NYSE/UNP) is one of the top railroad operators in North America. With a stock market capitalization of approximately $60.0 billion, the company operates in 23 states, mostly in the Western half of the U.S.
As a stock, Union Pacific (UP) has mostly gone upward in value throughout its history. There was quite a long period between 1993 and 2005 when the position was flat on the stock market. Investors just weren’t interested in dividend paying stocks; they wanted technology companies. But with rising earnings and dividends, UP recovered on the stock market after every major pullback and is currently trading right near its all-time high. The company’s recent stock chart is below:
Chart courtesy of www.StockCharts.com
Not surprisingly, one of the best buying opportunities for UP was the stock market crash in 2009. Trading close to $80.00 a share back then, when the market tanked, UP’s share price was cut in half. It’s been smooth sailing ever since, with the stock appreciating, virtually unabated, to its current level.
What I like about railroads are their consistency—consistency of earnings growth and dividend payments to shareholders. (See “Industrials Holding up Better Than Technology Stocks—the Consolidation Continues.”) If you think about the things you use in your daily life, a lot of these products are transported by rail to your marketplace, including automobiles, agricultural products, chemicals, lumber, energy, containers from China, and so on. A railroad truly is the backbone of an economy, and what a railroad reports about its operations is a leading indicator for the economy.
Last year, UP’s revenues grew to a record $19.6 billion, up 15% over 2010, which I think is pretty darn impressive. Earnings grew to a record $3.3 billion, for a gain of 18%, and the company increased its quarterly dividend rate to $0.60 a share in the fourth quarter of 2011, up a substantial 58% from a dividend rate of $0.38 a share in the first quarter of 2011.
The only problem with this business’ success is that, on the stock market, the company’s shares are rarely down for long, making a good entry point difficult to catch. This is why UP is a company worth following in anticipation of the next correction in the stock market.
A lot of investors look to the stock market for immediate capital gains, wanting to trade rather than invest. But as part of that investment strategy, owning the right blue chip companies with increasing dividends that are reinvested into new shares is one of the best ways to create wealth for yourself. Dividend reinvestment is the key because all great businesses experience periods of non-performance on the stock market.
I like railroads because the infrastructure has already been built and the operations are North American-based. The business of hauling freight is a good one and there’s a reason why Warren Buffett bought Burlington Northern Santa Fe outright—railroads make good money.
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