The transportation industry is highly sensitive to tariffs. Tariffs can affect freight costs, disrupt supply chains, and lower trade volumes.
Union Pacific (NYSE: UNP) is one of the largest railroads in North America. With a focus on the western two-thirds of the U.S., it also connects to Canada’s rail systems and serves all six major Mexico gateways.
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On paper, Union Pacific may appear to be highly sensitive to trade tensions. However, the company reported good earnings in its most recent quarter and held its prior guidance steady during a period when many companies are slashing their forecasts.
Here’s why Union Pacific remains a well-rounded dividend stock to buy now.
Image source: Getty Images.
Reaffirmed guidance
Union Pacific saw a 4% increase in first-quarter 2025 freight revenues, but a 15% fuel surcharge and other factors led to flat overall operating revenues.
Union Pacific breaks down its freight revenue into three key categories — bulk, industrial, and premium. Each segment makes up roughly a third of total freight revenue.
Bulk is primarily composed of grains, grain products, coal, and renewables, with a lesser quantity of fertilizers, food, and refrigerated products.
Industrial includes metals, minerals, industrial chemicals, plastics, energy, specialized markets, and forest products.
The premium segment mainly focuses on transporting merchandise in intermodal containers and, to a lesser extent, transporting automobiles and automotive parts.
In the first quarter, bulk revenue was up 1%, industrial was down 1%, and premium was up 5%.
On Union Pacific’s January earnings call, management was optimistic that the automotive market would improve throughout the year and domestic intermodal would be a bright spot. However, on the April earnings call, management said that automotive is vulnerable to tariff uncertainty and that it expects a slowdown in international intermodal. Union Pacific expects lower food and beverage, petroleum, automotive, and international intermodal volumes and flat coal volumes, but higher grain and grain products, industrial chemicals, plastics, and domestic intermodal volumes.
All told, management remained confident in the overall business performance due to strong carloads and a diversified mix of shipments. Union Pacific expects earnings per share to be consistent with its three-year compound annual growth rate target of high single to low double digits, an industry-leading operating ratio and return on invested capital (ROIC), a capital plan of $3.4 billion, and share repurchases of $4 billion to $4.5 billion. However, in the first quarter, diluted earnings per share (EPS) were up less than 1%,so Union Pacific will have some work to do for the rest of the year if it wants to hit its target.
Competitive advantages
Union Pacific is well-equipped to succeed even during a period of higher tariffs, thanks to its highly diversified product mix and low operating costs. Union Pacific reaffirmed its industry-leading operating efficiency and ROIC. A higher operating margin — which is the percentage of operating income to total revenue — implies higher profitability after accounting for all operating expenses. Similarly, a higher ROIC indicates a company is managing its debt and equity capital well to generate profits.
Over the last decade, Union Pacific has consistently maintained high 30% to low 40% operating margins and around a 14% ROIC even as it has grown revenue. As you can see in the following chart, Union Pacific’s revenue dipped during the pandemic, but then surged past pre-pandemic levels and has stayed high ever since.
UNP Revenue (TTM) data by YCharts.
Railroads benefit from economic growth, but they aren’t as cyclical as other parts of the transportation industry, like package delivery companies, for example. This is because the main expenses for railroads are maintaining the rail network, improving the network, labor, and fuel — all of which are fairly predictable in the short term.
Due to its highly diversified product mix and long-term contracts and volume commitments, demand is unlikely to fluctuate significantly even during economic slowdowns. For example, consider that operating revenue fell just 10% in 2020, and operating income fell 8%. That’s impressive considering the pandemic-induced economic slowdown in several of Union Pacific’s end markets.
A strong capital return program
High margins support a growing capital return program. In Q1, Union Pacific paid $804 million in dividends and spent $1.42 billion on stock repurchases. It was an outsized quarter for stock buybacks considering Union Pacific plans to repurchase $4 billion to $4.5 billion in stock for the full year, which would be around $1 billion to $1.13 billion per quarter. During the earnings call, the company stated that it made open-market purchases of an additional $220 million, taking advantage of “very attractive share prices.” This means management is confident that the stock is attractively valued despite a potential trade war.
Union Pacific can afford its sizable capital return program thanks to its highly profitable business model. The company consistently sports a sub-50% payout ratio, which is excellent. Since dividends make up less than half of earnings, Union Pacific has room to make buybacks without straining its balance sheet.
Union Pacific has continued to raise its dividend, but its stock price has remained stagnant, which has driven its dividend yield to 2.5%. Earnings growth has also led to a lower valuation, with the price-to-earnings ratio falling below 20 — a good value for such an industry-leading railroad.
A high-conviction buy for passive income investors
Union Pacific’s latest earnings call showcased management’s confidence in the company’s ability to absorb or pass along tariff-related costs. While Union Pacific isn’t immune to economic slowdowns, it has an impeccable track record of delivering strong results even during challenging periods, as evidenced by modest declines during the pandemic.
Union Pacific is a great value, and it has a good dividend yield as well. It’s a reliable option for passive income investors seeking a company they can count on, even if tariffs persist.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Union Pacific. The Motley Fool has a disclosure policy.
