Tuesday, May 5, 2015

Recent buy: Union Pacific Corp

Last week I wrote a post about the question in which company to invest next. I got several good tips, thanks! In the end I went back and forth between Johnson & Johnson (JNJ) and Union Pacific Corp (UNP). So what's my reasoning with this purchase?

  • I was not invested in any railroad company so far while I do have some healthcare exposure through BAX and to a lesser extent OHI.
  • The railroad industry has high barriers of entry and consequently a big moat. Railroads and trains have various competitive advantages over trucks (e.g. cost, speed, safety, environment) and will remain an important part of the future transport sector.
  • Current yield of UNP (2%) is lower than JNJ's yield (3%), however UNP's dividend growth in recent years outpaced JNJ's growth rate.
  • UNP's payout ratio (in terms of %EPS) is only 37% which leaves ample room for future dividend growth, especially with estimated EPS growth of ~14% in the next 5 years (analysts opinions...).
  • JNJ's payout ratio is slightly higher at 54% and estimated EPS growth rate is also lower at ~5% for the next 5 years.
  • The P/E-ratio is comparable (~18x)
  • Obviously JNJ's balance sheet is a fortress, but UNP's debt/equity ratio of 0.6 is not too bad either.
  • Total return in the last 10 years for UNP is a whopping 22% per year. Even half of that would be just fine by me! JNJ's total return in the last 10 years is only 6% per year. This gap is much smaller if you take into account the risk adjusted rate of return (JNJ is a much 'safer' investment in terms of beta). But still UNP is much more of a growth company than JNJ.
All in all I decided to open a position in Union Pacific Corp. My purchase of 15 shares add roughly 30 to my annual forward dividend income.


  1. Fantastic company to own - and a great price to initiate a position. Its been on my radar albeit a bit further down on the list. I own one railway (CN) but want to add another - my next railway will be UNP.

    Congrats on adding shares in this great company - im sure you will reap the rewards for years and decades to comes.

    Best wishes

  2. Interesting choice. UNP's yield is a little low for my taste, but, as you point out, its growth prospects are fantastic. If history repeats, you'll be in great shape with this investment! Good luck and keep up the good work.

  3. I'm a JNJ fan, but I can see where you're going with that buy. I actually like when people decide to not follow a trend and can explain their move! UNP looks solid too on top of that, although I prefer higher yield. Good buy :-)