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The board of Union Pacific Corporation (NYSE:UNP) has announced that it will pay a dividend of $1.30 per share on the 29th of September. This makes the dividend yield 2.2%, which will augment investor returns quite nicely.
View our latest analysis for Union Pacific
Union Pacific's Earnings Easily Cover The Distributions
A big dividend yield for a few years doesn't mean much if it can't be sustained. The last dividend was quite easily covered by Union Pacific's earnings. This indicates that quite a large proportion of earnings is being invested back into the business.
The next year is set to see EPS grow by 29.4%. If the dividend continues along recent trends, we estimate the payout ratio will be 41%, which is in the range that makes us comfortable with the sustainability of the dividend.
Union Pacific Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2013, the annual payment back then was $1.38, compared to the most recent full-year payment of $5.20. This means that it has been growing its distributions at 14% per annum over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.
Dividend Growth Is Doubtful
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Unfortunately things aren't as good as they seem. Union Pacific has seen earnings per share falling at 5.3% per year over the last five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
Our Thoughts On Union Pacific's Dividend
Overall, we think Union Pacific is a solid choice as a dividend stock, even though the dividend wasn't raised this year. The earnings coverage is acceptable for now, but with earnings on the decline we would definitely keep an eye on the payout ratio. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Union Pacific that you should be aware of before investing. Is Union Pacific not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.