{"id":20055,"date":"2023-09-08T23:56:00","date_gmt":"2023-09-08T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=20055"},"modified":"2024-07-12T17:43:54","modified_gmt":"2024-07-12T09:43:54","slug":"union-pacific","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/","title":{"rendered":"Union Pacific, representative of the duopoly"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#West_American_Railroad_Industry\" >West American Railroad Industry<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Rail_still_handles_most_freight\" >Rail still handles most freight<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Barriers_to_entry_are_too_high\" >Barriers to entry are too high<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Only_two_companies_monopolize_the_industry\" >Only two companies monopolize the industry<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Company_Profile\" >Company Profile<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Few_competitors\" >Few competitors<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Berkshire_has_its_rivals\" >Berkshire has its rivals<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Financial_strength\" >Financial strength<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Hhigh_debt\" >Hhigh debt<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#123_consecutive_years_of_dividend_payment\" >123 consecutive years of dividend payment<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Capital_Allocation_and_Strategy\" >Capital Allocation and Strategy<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Strategy\" >Strategy<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Capital_allocation\" >Capital allocation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Repurchase_could_erode_safe_investments\" >Repurchase could erode safe investments<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Average_price-to-earnings_ratio\" >Average price-to-earnings ratio<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"West_American_Railroad_Industry\"><\/span>West American Railroad Industry<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Rail_still_handles_most_freight\"><\/span>Rail still handles most freight<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>But few people know that railroads, the industry that Union Pacific belong to, are still responsible for transporting 30% of the goods used in the United States each year, which shows that this is a large proportion. It may not be glamorous, but it&#8217;s big business. Railways exist in a very special environment. In a word, there really can never be new market entrants, at least not new rail market entrants.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Barriers_to_entry_are_too_high\"><\/span>Barriers to entry are too high<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There&#8217;s no way any company would want to rebuild the Class 1 rail network built over the past 150 years, as it&#8217;s estimated to cost trillions of dollars, and that figure doesn&#8217;t even include land acquisition costs. This is the barrier to entry for creating a new railroad company, and the numbers are astronomically large.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Only_two_companies_monopolize_the_industry\"><\/span>Only two companies monopolize the industry<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In North America, it&#8217;s almost synonymous with railroads, with 32,000 miles of railroad tracks. Stretching across the Great Western United States, two railroad companies operated as a duopoly. The two railroads, <a href=\"https:\/\/en.wikipedia.org\/wiki\/BNSF_Railway\" target=\"_blank\" rel=\"noreferrer noopener\">BNSF (Burlington, Northern Santa Fe) <\/a>and <a href=\"https:\/\/en.wikipedia.org\/wiki\/Union_Pacific_Railroad\" target=\"_blank\" rel=\"noreferrer noopener\">Union Pacific (UNP)<\/a>, formed the Northwest Territory monopoly. The Burlington Northern Santa Fe Railroad has been acquired by Berkshire.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Company_Profile\"><\/span>Company Profile<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Union Pacific (ticker: UNP) is a railroad company and one of the largest railroad companies in the United States. Railroads are not, in my opinion, the most progressive industry, nor one with much potential for growth.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Few_competitors\"><\/span>Few competitors<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>So it&#8217;s really a protected industry and there won&#8217;t be much competition. Maybe you could say that there are other types of competitors, that is, other types of ships; ships, planes, and other types of ships. But for 30 percent of all freight transported in the United States, railroads are the only option, and Union Pacific is arguably the biggest of them all.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Berkshire_has_its_rivals\"><\/span>Berkshire has its rivals<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In the shadow of the Great Recession in late 2009, Berkshire acquired the Burlington Northern Santa Fe Railroad (ticker: BNSF). Buffett mentioned in his 2015 shareholder letter: &#8220;BNSF accounted for 17% of the US intercity freight market in 2015.&#8221;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Financial_strength\"><\/span>Financial strength<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Hhigh_debt\"><\/span>Hhigh debt<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Union Pacific has $10 billion in operating income. They do have $35 billion in debt. Again, let&#8217;s focus on the balance sheet.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"123_consecutive_years_of_dividend_payment\"><\/span>123 consecutive years of dividend payment<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Union Pacific is a very good company with a 2.7% dividend yield. Most people are probably looking at the railroad&#8217;s dividend yield. But they have paid a common stock dividend for 123 consecutive years. That&#8217;s certainly the kind of stability some more conservative or older investors are really looking for.<\/p>\n\n\n\n<p>After 123 years of consistent dividend payments, I can imagine Union Pacific spending a lot of cash flow on those dividends. At the same time, many of the railroads we see in the news, including Union Pacific, are having talent and some safety issues.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Capital_Allocation_and_Strategy\"><\/span>Capital Allocation and Strategy<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Strategy\"><\/span>Strategy<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In general, the industry has had to clean up a litany of security issues that have only really popped up in quite a big way recently. This is mainly for safety reasons, but also because we don&#8217;t want continued interruptions in the movement of goods across the country. But I think it&#8217;s mostly for safety. Let&#8217;s be careful.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Capital_allocation\"><\/span>Capital allocation<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In terms of capital allocation, they returned about $10 billion to investors last year; $7 billion of that was through share buybacks and about $3 billion through dividends. Dividends, I&#8217;m always a little bit tricky with share buybacks because you want to make sure they&#8217;re buying shares at an attractive price for shareholders, especially at that level.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Repurchase_could_erode_safe_investments\"><\/span>Repurchase could erode safe investments<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>I&#8217;m going to have to dig a little deeper to see if 7 billion is the right number. This seems a bit high. They need to undo that and increase their capex, especially to address some of these security issues that we discussed. The stock has an activist investor who is primarily calling for a CEO change, so all that comes out of that is improving operating metrics and improving the overall business.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Average_price-to-earnings_ratio\"><\/span>Average price-to-earnings ratio<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This is another company with a relatively low PE ratio of 17, but it&#8217;s not unique. Other railway companies listed on the US stock market: CSX Transportation Company (ticker: CSX) is 16 times, Norfolk Southern Railway (ticker: NSC) is 15 times, and the Canadian National Railway Administration (tickere: CNI) is 20 times. They are all in the 15 to 20 range. Not very high, it can be seen that Union Pacific&#8217;s price-to-earnings ratio is at an average level.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"48\" height=\"56\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2023\/05\/unp.jpg\" alt=\"Union Pacific\" class=\"wp-image-20061\"\/><figcaption class=\"wp-element-caption\">credit: Union Pacific<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/02\/11\/the-differences-between-visa-and-mastercard\/\" target=\"_blank\" rel=\"noreferrer noopener\">The differences between Visa and Mastercard?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/06\/04\/has-the-moat-of-the-two-major-credit-card-networks-loosened\/\" target=\"_blank\" rel=\"noreferrer noopener\">Has the moat of ubiquitous credit card networks loosened?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/13\/there-are-indeed-monopoly\/\">There are indeed monopoly in this world<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/08\/monopolies-or-oligopolies\/\">How do monopolies or oligopolies work in the real world?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/02\/23\/industries-with-moat\/\">Industries with moat and going downhill<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/05\/21\/how-should-investors-view-companies-being-included-in-the-antitrust-investigation-list\/\">Investors should not afraid of antitrust investigation on your holdings<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/06\/08\/tech-antitrust-governance\/\">Antitrust and governance faced by Chinese and American technology giants<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/08\/union-pacific\/\" target=\"_blank\" rel=\"noreferrer noopener\">Union Pacific, representative of the duopoly<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Union Pacific and Berkshire&#8217;s BNSF, the U.S. railroad duopoly<\/p>\n","protected":false},"author":1,"featured_media":20061,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[986,693,548,485,28],"tags":[48,49,989,991,990,988],"class_list":["post-20055","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-transportation","category-duopoly","category-monopoly","category-oligopoly","category-us-stock-market","tag-brk-a","tag-brk-b","tag-cni","tag-csx","tag-nsc","tag-unp"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/20055","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=20055"}],"version-history":[{"count":8,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/20055\/revisions"}],"predecessor-version":[{"id":21632,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/20055\/revisions\/21632"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/20061"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=20055"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=20055"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=20055"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}