The transportation industry moves goods, freight, and people -- consisting of package delivery companies like FedEx and United Parcel Service, logistics and freight companies, long-haul trucking, railroads, airlines, and more.

The industry can be a good barometer for economic growth. When the economy is booming, the movement of goods can increase, and folks may be more willing to travel. But when the economy is contracting, consumption can slow -- impacting volumes.

Union Pacific (UNP 0.49%) is one of the largest railroads in North America -- dominating railroad shipping lines west of the Mississippi River. But Union Pacific also connects to Canada's rail systems and serves all six major Mexico gateways. Union Pacific could be vulnerable to tariffs between the U.S. and its North American neighbors, but that doesn't mean that tariffs would derail its investment thesis.

Here's why Union Pacific remains a solid dividend-paying value stock to buy now.

Image source: Getty Images.

Tariffs aren't the end of the world for Union Pacific

Since tariffs essentially tax cross-border trade, they could lead to lower exchange volumes between the U.S. and Mexico. However, tariffs could also lead to higher U.S. manufacturing, boosting domestic volumes and ultimately benefiting U.S. railroads.

Union Pacific hosted its latest earnings call in late January -- before the recent increase in trade tensions and tariff talk. But even then, management expressed confidence in its ability to navigate tariffs, explaining that it prepares for a worst-case scenario. CEO Jim Vena said on the fourth-quarter 2024 earnings call:

We have the capability at Union Pacific to react to anything that's thrown at us. Good strong balance sheet, real good, focused marketing team operations that's looking to be more efficient. And I look at the entire package, if we get tariffs but we also get the regulatory changes and we get the tax changes that we're talking about by the President with how depreciation is going to work on capital and how our corporate tax rate works that could be a lot of positive.

In other words, Union Pacific is looking at changes in economic policy as a whole, not just focusing on tariffs in a vacuum. Kenny Rocker, Executive Vice President of Marketing and Sales, added on the earnings call:

We've seen this before; it's really about being prepared. And what generally happens is maybe the origin location shifts from Asia to Mexico or Canada and that commodity is priced in, that tariff is priced in. But being prepared is a critical thing.

A decrease in trade between the U.S., Mexico, and Canada could increase trade with other countries. As long as transportation demand remains strong, the origin location could change, and Union Pacific could still do well.

A high-quality company at a compelling valuation

The company is positioned differently than, say, package delivery companies. FedEx and United Parcel Service have seen their stock prices plummet to 52-week lows because tariffs and an economic slowdown could reduce package delivery volumes and weigh on consumers. An economic slowdown wouldn't be great for Union Pacific either, but it isn't as directly exposed to consumers as package delivery companies.

Union Pacific has a cost structure that is different from other transportation companies. The rail network is already set up, so costs mainly come from servicing the network, fuel, labor, and other operating costs. The business model leaves Union Pacific with a manageable cost structure that leads to strong free cash flow (FCF) and high margins no matter what the economy is doing.

Over the past 15 years, Union Pacific has steadily grown its revenue, operating income, and FCF while never reporting a year of negative operating income or FCF.

UNP Revenue (TTM) data by YCharts

In that 15-year period, Union Pacific has increased its dividend by over 700% and reduced its share count by over 40% through stock buybacks, making it a solid dividend stock and a good value. Union Pacific's payout ratio is 48% -- meaning the dividend takes up less than half of earnings. A payout ratio of 50% to 75% is generally considered healthy. Union Pacific currently has a dividend yield of 2.3%.

Union Pacific's price-to-earnings (P/E) ratio is just 20.9, which is right around its 10-year median P/E of 20.4. All told, the stock remains well-balanced between potential growth, income, and value.

A top safe stock to buy now

Union Pacific is a coiled spring for economic growth. However, unlike other cyclical companies in the industrial sector, its earnings have historically not been volatile.

Rail is the most efficient form of transporting goods long distances on land. So, even if costs go up, Union Pacific should have pricing power. Its business model ensures it generates strong margins even when there are economic slowdowns.

Add it all up, and Union Pacific stands out as an excellent value stock to buy now.