Hop On Board This Dirt Cheap Value Stock to Help Boost Your Passive Income Stream in 2025 and Beyond

Union Pacific (NYSE: UNP) stock jumped 5.2% on Jan. 23 in response to strong fourth-quarter and full-year 2024 earnings and 2025 guidance. Along with Berkshire Hathaway-owned BNSF, Union Pacific dominates railroad shipping lines west of the Mississippi River. Given the limited competition and the value of its infrastructure, Union Pacific is well-positioned to steadily grow its earnings and dividends over time.

Here's why this dividend stock remains a great choice for income-oriented investors to buy now and hold for years to come.

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Expanding operating margins

Union Pacific boosted its efficiency in 2024, moving 5% more cargo volume with 3% fewer employees. The company also benefited from lower operating costs, thanks to noticeable decreases in the prices of fuel and other items. So even though its revenue rose by just 1%, Union Pacific's operating income rose by 7%, and its net income popped by 6%.

Data source: Union Pacific.

In 2024, Union Pacific had an operating margin of 40% and a profit margin of 27.8%. This means that for every dollar earned in revenue, Union Pacific took home over 27 cents in after-tax net income. That result is a testament to the advantages of the railroad business model.

The bulk of the costs of operating a railroad come from labor, fuel, and rail network maintenance. Capital investments are relatively small. In 2024, Union Pacific spent $3.45 billion on capital investments such as upgrading and replacing infrastructure, locomotives, and equipment.

Union Pacific's high operating margins and limited capital investments make it a cash cow. Even when factoring in its investing activities and the $3.21 billion it paid in dividends last year, the company was still left with a whopping $2.81 billion in free cash flow -- 11.6% of its revenue.

A diversified revenue stream

Union Pacific ships a vast array of products and commodities, giving it diverse exposure to various end markets. This diversification helps cushion the impacts on it from category-specific downturns. For example, its freight revenue from coal and renewables plunged by 23% in 2024, but it offset that decline with growth in other categories.

Data source: Union Pacific.

Longer term, it's important for Union Pacific to position its network so that it can adapt to changing trends and stay ahead of the market. Utilities' ongoing transitions from coal to natural gas will benefit pipeline and energy infrastructure companies and hurt railroads.

However, railroads can adapt by capitalizing on a growing petrochemical and industrial chemical business and the transportation of feedstocks used to make biofuels. On its latest earnings call, Union Pacific management discussed why it was optimistic about the growing demand for grain products used to make renewable diesel fuel.

In sum, Union Pacific's coal and renewables revenue may continue to slide in the near term, but the railroad could still benefit longer term as the market for renewable transportation fuels matures.

In the near term, Union Pacific's results are liable to ebb and flow based on the economic cycle. For 2025, management predicts modest growth in industrial production, 2% gross domestic product growth (down from 2.8% in 2024), slightly fewer U.S. housing starts, slightly higher light vehicle sales, and 2.7% growth in durable and non-durable consumer goods spending (compared to 2.3% in 2024).

Overall, the macroeconomic picture is a bit mixed, but it should be good enough for the company to build upon its 2024 earnings growth.

A quality dividend stock at a good value

Union Pacific is a highly efficient railroad that generates plenty of cash that it can use to reinvest in growth, hike its dividend, and buy back shares.

The company has paid dividends for 125 consecutive years and raised its payouts every year since 2008. Over the last decade, it has increased its dividend by 144% and reduced its share count by about 31%. As the number of shares outstanding has shrunk, Union Pacific's diluted earnings per share have risen at a far faster rate than net income, making the stock a better value.

Even after the surge in the stock price at the end of last week, Union Pacific still sports a price-to-earnings (P/E) ratio of just 22.9 and a forward P/E of 20.6. That is slightly above its historical averages, but not by much.

UNP PE Ratio data by YCharts.

In fact, one could argue that Union Pacific deserves a higher valuation. In its latest earnings release, Union Pacific said it was on track to meet the targets for 2025 that it laid out during its investor day presentation back in September.

At the time, management forecast that from 2025 through 2027, it would achieve a compound annual growth rate for earnings per share in the high single digits to the low double digits, spend $3.5 billion to $3.7 billion annually on capital investments, $4 billion to $5 billion per year on stock buybacks, make consistently annual dividend hikes with a payout ratio of around 45%, and maintain a strong investment-grade credit rating.

Given its current market capitalization of around $150 billion, that pace of buybacks would mean Union Pacific is reducing its share count by around 3% per year, which is a rapid rate. Few companies generate the amount of capital necessary to repurchase that amount of stock year after year while also raising their dividends and maintaining a low payout ratio.

A payout ratio in the range of 50% to 75% is generally considered healthy for strong businesses, so the fact that Union Pacific's goal is below that and the stock yields 2.3% is a good sign that the dividend is affordable.

Union Pacific is a high-conviction buy

With a reasonable valuation, a growing dividend, and an industry-leading business, Union Pacific stands out as an excellent dividend stock to buy in 2025. The company can continue improving its efficiency and growing earnings at a solid rate.

Its dividend and aggressive buybacks ensure that Union Pacific can remain a good value even after run-ups like the one that occurred last week. All told, Union Pacific appears to be the type of foundational dividend stock that investors can build their passive income portfolios around.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Union Pacific. The Motley Fool has a disclosure policy.