Leading freight railroad company, Union Pacific Corp. (UNP – Analyst Report) announced on Nov 21 that it intends to repurchase 60 million shares over the next four years, representing 13% of its current shares outstanding. The company plans to start this program on Jan 1, 2014 replacing the ongoing share repurchase authorization ending Dec 31, 2013.
Market sentiments remain positive to this news and share price appreciated approximately 2% since last Thursday opening.
The share repurchase reflects the company’s strong free cash flow and confidence in generating solid reinvestable returns for its shareholders. Despite making huge investments, Union Pacific possesses one of the industry’s strongest balance sheets with solid free cash flow ($1,317 million in the third quarter), which encourages it to raise dividends and repurchase shares driving improved shareholder returns.
The company boosted its annual dividend by 15.0% during 2012 and attained a payout ratio of approximately 30.0%. In Aug 2013, the company raised its dividend by 14.5% to 79 cents per share. As of Sep 30, 2013, Union Pacific bought back nearly 9.6 million shares for $1.4 billion and has roughly 5.4 million shares remaining under its current authorization.
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Investor confidence in Union Pacific was also solidified with its recent earnings beat. The company reported third quarter adjusted earnings of $2.48 per share, surpassing the Zacks Consensus Estimate of $2.47 and year-ago earnings of $2.19. The increase was aided by higher pricing and an improvement in operating ratio, which more than offset flat volumes.
Most of Union Pacific’s segments reported steady performance in the third quarter. We believe such strong segmental growth has also allowed Union Pacific to raise investor returns. Nevertheless, concerns related to agricultural and coal volumes, stringent regulations, rising expenditures and competitive threats keep us wary on the near-term results of the company. Additionally, the export business of the company is exposed to global uncertainties, which also pose threats in the current macroeconomic scenario.
Union Pacific, which operates with other railroad companies like CSX Corp. (CSX –Analyst Report), Kansas City Southern (KSU – Analyst Report) and Canadian Pacific Railway Ltd (CP – Analyst Report), currently has a Zacks Rank #4 (Sell).