Union Pacific Corp. (UNP), the largest class 1 freight railroad operator in the U.S., has decided to increase its shareholders’ wealth. Yesterday, the Board of Directors of Union Pacific have authorized to raise its quarterly dividend rate by over 26% to 60 cents per share from the existing level of 47.5 cents per share. The increased dividend will be paid on January 2, 2012 to stockholders of record as of November 30, 2011.
As per management, huge free cash flow along with fairly bright future business opportunity are the primary reasons for the dividend hike. Union pacific reported record-breaking financial results in the previous quarter. Third-quarter 2011 net income was a historic-high $904 million.
Quarterly Freight revenue of all the six business groups increased in the last quarter. Four out of six business groups of Union Pacific posted business volume growth in the previous quarter.
The U.S. railroads are gaining momentum over the trucking industry due to the significant rise in fuel costs of truckers. The railroads are at present carrying more cargos, which is helping them to prosper even under a challenging economic scenario. Union Pacific is a major beneficiary for this favorable industry trend.
This is the second time in 2011 that management has raised its dividend rate. In 2011, dividend per share increased by an enormous 58% year over year.
Freight rail is a “derived demand” industry. Moreover, rail services are included in the demand for the products that railroads haul. Rail traffic, therefore, acts as a solid barometer for the overall health of the economy. Several railroad operators, such as Union Pacific, CSX Corp. (CSX), and Norfolk Southern Corp. (NSC) have expressed their confidence that growth rate of business volume in 2011 will exceed the U.S. GDP and industrial production growth rate. Similarly, core pricing gain in 2011 will also exceed inflation.
CSX CORP (CSX): Free Stock Analysis Report
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
UNION PAC CORP (UNP): Free Stock Analysis Report
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