Is Union Pacific the Right Stock to Retire With?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Union Pacific (NYS: UNP) has what we're looking for.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Union Pacific.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$43.1 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

3 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

1.16

Fail

 

Worst loss in past five years no greater than 20%

(22.7%)

Fail

Valuation

Normalized P/E < 18

14.99

Pass

Dividends

Current yield > 2%

2.2%

Pass

 

5-year dividend growth > 10%

21.1%

Pass

 

Streak of dividend increases >= 10 years

5 years

Fail

 

Payout ratio < 75%

23.6%

Pass

 

 

 

 

 

Total score

 

5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

Union Pacific's score of five shows that it hasn't delivered everything that conservative investors prefer to see from a company. Yet the company has actually grown much faster than the numbers above would suggest, and conditions continue to be favorable for the railroad industry.

As one of the major railroad companies, Union Pacific dominates the Western U.S., and that has been a good place to be lately. In 2010, the company saw revenue jump 20%, helping drive net income up by 47%. Peers CSX (NYS: CSX) and Norfolk Southern (NYS: NSC) have also posted strong gains during the economic recovery.

The biggest growth area for Union Pacific right now is in the Bakken shale play in North Dakota. With routes that take oil to the Gulf Coast for refining, Union Pacific is poised to take advantage of the energy boom as long as it lasts. And with energy players including Continental Resources (NYS: CLR) , EOG Resources (NYS: EOG) , and Denbury Resources (NYS: DNR) all clamoring to get exposure to the region, it's likely to remain popular for some time.

Retirees and other conservative investors get a 2% dividend as well as a reasonable valuation after a recent pullback for the stock. Share prices tend to be a bit more volatile than you might prefer, but Union Pacific still deserves a look to see if it belongs in your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Union Pacific to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the13 Steps to Investing Foolishly.

At the time this article was published

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