More than $6,000in new capital(including reinvested dividends) put to work.
Those will likely be records that stand for a long time to come.
I honestly wasn’t planning on doing anything else this month. Not only was I happy with the stocks I bought and the prices I paid relative to their respective intrinsic values and long-term earnings power, but my capital was just about exhausted. And that’s why I prefer cash flow to cash: The former regenerates itself, while I have to actively rebuild the latter. And with all that money I spent on stocks this month, along with a fat quarterly estimated tax payment sent in, cash is low.
But I expect some income tomorrow, so I’m okay with a precariously low cash position if we’re talking about just a day or two. And by precariously low, I mean anything less than $3,000 in my bank account. I tend to keep between $3,000 and $5,000 in cash for emergencies as well as just running the monthly budget. Allows me to sleep well at night. And I like my sleep.
What happened here is the market pulled back some yesterday on fears over what’s going on with Greece (an economy that’s smaller than the metro Boston area). Nothing more than really just a hiccup; I was hoping for fireworks!
Nevertheless, many of the stocks that I’m actively buying have been steadily and consistently pulling back to even better values. As always, I follow and value individual stocks, not the broader market. And the stock I’m about to discuss is now down approximately 20% YTD. Who needs a stock market correction when individual stocks are correcting twice over? I see that as an opportunity to go shopping!
I purchased 10 shares of Union Pacific Corporation (UNP) on 6/30/15 for $95.50 per share.
Union Pacific Corporation is the largest public US railroad, operating 32,000 miles of track that serves the western two-thirds of the country which includes some of the fastest-growing US population centers across 23 states.
Union Pacific connects with Canada’s rail system and they’re the only railroad that serving all six major Mexico gateways.
Founded in 1862, they now serve roughly 10,000 customers.
2014 freight revenue breaks down via the following six commodity groups: Industrial Products (20%), Intermodal (20%), Coal (18%), Agricultural Products (17%), Chemicals (16%), and Automotive (9%).
2014 carload composition was 61% domestic and 39% international.
More Averaging Down
I can’t predict where stock prices are going to go. I certainly can’t predict what the entire stock market’s going to do tomorrow. But I can predict with some confidence and accuracy that Union Pacific will be a more profitable company a decade from now and will also be sending out more dividends to shareholders. And that’s really the only prediction I care about.
The last time I bought shares in UNP was just earlier this month at $100.82 per share. I tend to look to average down when a stock has fallen about 5% or so. We’re there. And I actually feel comfortable averaging down even quicker than that when we’re talking about a stock like UNP where the growth, quality, and valuation are all there for me. I thought it was a solid long-term value at the ~$106 I paid when I initiated my position in this great railroad. I liked it even more when I bought more below $101. So I love it at $95. Of course, I wouldn’t mind at all seeing it drop to $90 or even $85. More shares and more dividend income for the same amount of money works wonders for my long-term goals.
There are numerous risks with UNP and other railroads.
There are extensive costs to maintaining a railroad. Unlike a lot of other methods of transportation, railroads must maintain their own networks. This is expensive – UNP has invested more than $31 billion in its network and operations from 2005 to 2014. So the infrastructure there remains extremely valuable and probably impossible to replicate, but also expensive to maintain. In addition, there are significant input costs varying from labor to fuel.
Regulation remains omnipresent. Any negative changes here could have material impacts on UNP’s costs to operate and/or ability to maintain profitability in a competitive manner.
As a railroad, UNP is exposed to the broader economy and all the ups and downs that comes with. Any major drop in activity across the economy as it relates to demand for goods could reduce demand for their services. However, they performed quite well during the recent Great Recession.
There are also black swan risks, including derailments and spills.
UNP’s stock sports a P/E ratio of 16.28 right now. That compares favorably to both the broader market as well as the stock’s five-year average P/E ratio of 17.5. In addition, the current yield of 2.30% is significantly higher than the five-year average of 1.7%.
I valued shares using a dividend discount model analysis with a 10% discount rate and an 8% long-term dividend growth rate. That growth rate seems fair considering it’s less than half that of UNP’s own long-term growth rates for EPS and the dividend. I’m factoring in the low payout ratio, growth forecast moving forward, and the extremely strong business model. The DDM analysis gives me a fair value of $118.80.
Like I’ve mentioned numerous times about UNP, the railroad business model is one of my favorites. The built-in competitive advantages regarding scale, cost, and barriers to entry are absolutely incredible. I find the odds that UNP will be around in 50 years to be quite high, which, from a long-term dividend growth investor’s perspective, are the kind of odds I like. Union Pacific has been making money (and quite a bit of it) for more than 150 years and I see no reason that will dramatically change tomorrow, the next day, or 10 years from now.
I’ll very likely continue to build this position over time and scale my way in. If I can keep averaging down like this, I’ll be ecstatic. The long-term plan is to make UNP a fairly large position, so I see another purchase or two ocurring over the near term.
If you’re interested, I included some fantastic coverage of UNP and railroads in general just recently. Definitely worth a read if you’re a shareholder or interested in becoming one. In addition, I included a link to my original analysis on UNP above, which goes over the investment thesis behind these purchases.
This purchase adds $22.00 to my annual dividend income, based on the current $0.55 quarterly dividend.
I’m going to include current valuation opinions from other analysts below, which I use to concentrate my reasonable valuation estimate:
Morningstar rates UNP as a 4/5 star valuation, with a fair value estimate of $115.00.
S&P Capital IQ rates UNP as a 4/5 star “buy”, with a fair value calculation of $109.10.
I’ll update my Freedom Fund in early July to reflect this recent purchase.
Full Disclosure: Long UNP.
What do you think about UNP and/or the railroads here? Think there’s tremendous long-term value? Concerns?
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