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Union Pacific: Share Repurchases Create Wealth for Shareholders

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Share repurchases

Share repurchases are another strategy that Union Pacific (UNP) uses to create wealth for its shareholders. Organizations consider share buybacks as a more tax-efficient method to maximize shareholders’ wealth compared to dividend payments. Since share repurchases reduce the number of outstanding common stocks, they boost the company’s EPS.

Continuing the policy of enhancing shareholders’ wealth, Union Pacific announced a new share repurchase authorization on February 7. Under the authorization, the company will repurchase up to 150 million of its common stock by March 31, 2022. The new authorization limit accounted for 21% of the company’s total number of outstanding shares as of February 7, which translates to over $20 billion.

Union Pacific has also targeted to buy back ~$20 billion of its common stock between 2018 and 2020. Last year, the company bought back $8.2 billion worth of its shares. Since initiating the first share repurchase program in 2007, Union Pacific has repurchased over $35 billion of its common stock.

The railroad company repurchased $3.5 billion of its stock in the first quarter and paid $626 million in the dividend. Share repurchases and dividend payments show a company’s sound financial position and give investors confidence in the stock.

Union Pacific ended the first quarter with $1.1 billion in cash, cash equivalents, and restricted cash. The company generated an operating cash flow of $2 billion and a free cash flow of $549 million in the first quarter.

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Stock performance

So far, Union Pacific has been investors’ industry favorite in 2019. The stock has risen ~27% YTD (year-to-date) and significantly outperformed US indexes’ gains. The Dow Jones, the NASDAQ, and the S&P 500 have risen 10.9%, 19%, and 14.7%, respectively.

Union Pacific stock’s YTD gains have also beat the Industrial Select Sector SPDR ETF’s (XLI) gains. XLI, which invests in industrial sector stocks listed in the S&P 500, has risen 17.5% YTD.

Union Pacific’s YTD gains have remained on par with most of its peers. CSX (CSX), Norfolk Southern (NSC), and Kansas City Southern (KSU) have registered YTD gains of ~26%, 37.2%, and 27.1%, respectively.

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