(The following story by Joe Ruff appeared on the Omaha World-Herald website on May 6, 2010.)
OMAHA, Neb. — More confidence in the nation’s economic recovery and in the strength of Union Pacific Corp., even in a downturn prompted the railroad Thursday to increase its dividend by 22 percent and to resume a stock repurchase program.
“Two weeks ago Union Pacific reported record first quarter earnings, evidence that we are emerging from the challenge of last year’s recession as a stronger, more profitable company,” U.P. Chairman and CEO Jim Young told about 100 shareholders at the company’s annual meeting in Salt Lake City. “With business volumes continuing to grow, we feel very positive about the long-term fundamentals of our business as well as U.P.’s strategy to make the most of these opportunities.”
Union Pacific’s board increased the dividend to 33 cents a quarter from 27 cents, payable July 1 to stockholders of record May 28.
The stock repurchase program authorizes the company to buy up to 32.6 million shares by March 31, 2011.
Union Pacific also added $100 million to its capital spending in 2010, bringing the total allocated to $2.6 billion. The extra money primarily will be used to buy more containers and other intermodal equipment to support the railroad’s ability to transfer cargo easily from ships to trains to trucks.
The Omaha-based railroad’s domestic intermodal business grew 8 percent last year, despite one of the worst recessions in decades, Young said.
Efficiency improvements helped Union Pacific deliver record first quarter net income of $516 million, or $1.01 per share as business volume grew 13 percent from the same period in 2009.
Demand continued to gather strength midway through the second quarter, with carloads up 16 percent last week compared with the same period last year.
Union Pacific’s stock closed down $2.09 at $72.20 Thursday as stocks dropped steeply in a broad selloff. U.P. stock has risen over the last year from a low of $44 a share.
During an interview with The World-Herald in advance of Thursday’s meeting, Young said he remained cautious about the strength of the economic recovery.
Government stimulus efforts, such as an $8,000 homebuyer tax credit, are coming to an end, which could slow growth as the country emerges from the worst downturn since the Great Depression, Young said.
“What is the staying power here?” Young said. “I think the slope will be positive, but it’s going to be a very slow slope.”
Regardless of economic conditions, Union Pacific is determined to deliver good returns — and no surprises — for shareholders, Young said.
“I sit across from shareholders and they say, ‘Jim, you guys have done a great job. But don’t miss.’ This is a business that should be consistent every quarter.”
In a 40-minute interview at Union Pacific’s headquarters, Young also said investors have put more money into U.P. since Berkshire Hathaway Inc. bought rail rival Burlington Northern Santa Fe Corp.
Young said a number of BN shareholders sold their stock on the sale announcement, collected their profits and then bought U.P.
Berkshire CEO Warren Buffett’s $26 billion cash and stock deal for Burlington Northern left Union Pacific as the only publicly traded, major railroad in the West.
Buffett has not said why he picked BNSF Railway over Union Pacific, but analysts have surmised it might be Burlington Northern’s history of generating cash compared with Union Pacific’s. Buffett also has said he likes the prospects of all freight railroads, particularly in the West.
Many large, long-term investors in Union Pacific like The Capital Group sold Burlington Northern stock before the merger and bought more Union Pacific stock, Young said.
“They made money in BN and they’ve made more money in U.P.,” Young said.
Officials at Capital Group in Los Angeles declined to comment.
The lastest filings with the Securities and Exchange Commission indicate that the investment company is the largest holder of U.P. stock at 10 percent or 55 million shares, and that it bought 15 million shares in the fourth quarter.
Buffett announced in November that he planned to buy Burlington Northern for $100 a share, a 30 percent premium on its share price at that time.
Fidelity Management and State Street Corp., also among top holders of Union Pacific stock, increased their stakes in U.P., while Marsico Capital Management sold some of its holdings.
Young said Buffett’s purchase might have helped spur higher stock prices, but the impact will not last long.
“For me, you have to perform,” Young said.
The recession hit railroads hard, and business did not pick up across the country and for Union Pacific until the first three months of 2010, the first sustained increase in freight demand in two years, Young said.
The improvement came from a low base, however, and about 2,500 Union Pacific employees remain furloughed. Last June, 5,300 workers were furloughed.
About 1,330 locomotives and 38,000 freight cars remain sidelined, representing about $6 billion in idled assets, Young said. Union Pacific will call workers back to work and put more cars into service as business improves, he said.
In other topics:
— It is too early to tell what impact the oil spill in the Gulf of Mexico might have on Union Pacific’s business. “We’re prepared, whatever state and local officials need to do in terms of shipping. We’re prepared to handle it, either way.”
— Young downplayed a comment by Buffett at last week’s Berkshire shareholders meeting regarding railroad mergers that “something could happen to the Kansas City Southern.” That kind of speculation has been around for years, Young said. “If I go to my top 20 things I have to pay attention to right now, it’s not on that list,” he said.
— A Union Pacific line from Chicago to St. Louis could be among the first high-speed passenger corridors planned by President Barack Obama’s administration. But high-speed rail is expensive, will have to work with existing freight rail infrastructure and might not be a good long-term investment, Young said. “You are not going to go out in this country and build a ‘green-field’ high-speed rail corridor.”
— Capital needs in freight railroads, including replacing old bridges and maintaining and expanding rail lines, are immense. The federal government must allow railroads to make a good return on such investments or they won’t invest in their infrastructure, Young said.