Stocks for the Long Run: Union Pacific vs. the S&P 500

Investing isn't easy. Even Warren Buffett counsels that most investors should invest in a low-cost index like the S&P 500. That way, "[You'll] be buying into a wonderful industry, which in effect is all of American industry," he says.

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how members of the S&P 500 have performed compared with the index itself.

Step on up, Union Pacific (NYSE: UNP  ) .

Union Pacific shares have roughly matched the S&P 500 over the last three decades, with big outperformance in more recent years:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 11% a year, compared with 11.1% a year for the S&P (both include dividends). One thousand dollars invested in the S&P in 1980 would be worth $29,400 today, and naturally about the same in Union Pacific.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up about half of Union Pacific's total returns. For the S&P, dividends account for 41.5% of total returns.

Now have a look at how Union Pacific's earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Pretty good outperformance, most of which came in recent years. Since 1995, Union Pacific's earnings per share have grown by an average of 10.8% a year, compared with 6% a year for the broader index. That's a testament to the revival of the railroad industry, which has enjoyed a new boom as gas prices rose and rail cars became more competitive with trucks.

But that earnings-growth dynamic hasn't led to superior valuations. Union Pacific has traded for an average of 19 times earnings since 1980 -- a slight discount to the 21 times earnings the S&P 500 averaged during the period.

Through it all, the company has still been a pretty average performer historically.

Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks Union Pacific with a five-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Union Pacific to My Watchlist.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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