Eaton (ETN) - Valuation Analysis

Description

Eaton Corporation (Eaton) is a diversified power management company. It is engaged in the manufacturing of electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use, and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. On January 1, 2011, it closed the acquisition of the Tuthill Coupling Group, which is a division of the Tuthill Corporation. It has five segments: Electrical Americas and Electrical Rest of World; Hydraulics; Aerospace; Truck, and Automotive. On October 12, 2010, it acquired Chloride Phoenixtec Electronics. On October 1, 2010, it acquired CopperLogic, Inc. On August 25, 2010, it acquired Wright Line Holding, Inc. On July 15, 2010, it acquired EMC Engineers, Inc. In May 2011, it acquired Internormen Technology Group.

Source: Reuters

Valuation

Key assumptions included:

                Terminal growth rate: 5.0%

                Risk-adjusted discount rate: 13.5%

                Cost of sales: 70.0%

                Selling, general, & administrative costs as % of sales: 18.0%

                Research & development as % of sales: 3.0%

                CAPEX as % of sales: 4.0%

                Depreciation as % of sales: 4.5%

                Effective tax rate: 8.0%

                Day sales in receivables: 60

                Day sales of inventory: 57

                Days payable outstanding: 53

At a 13% growth rate (bull case), I estimate the intrinsic value of ETN to be $40.59 per share.  With a risk-adjusted margin of safety of 12.6%, the target purchase price is $35.47 per share.  This is below the $40.65 per share MMM is currently trading at.  At $40.65, ETN is trading at 0.2% premium to the intrinsic value indicating it is a value in this scenario.

At a 6% growth rate (bear case), I estimate the intrinsic value of ETN to be $23.92 per share.  With a risk-adjusted margin of safety of 19.3%, the target purchase price is $19.32 per share.  This is below the $40.65 per share ETN is currently trading at.  At $40.65, ETN is trading at 70.0% premium to the intrinsic value.

Dividends

ETN pays a quarterly dividend.  From 2001 to 2010, ETN’s dividend has grown from $0.44 per share to $1.08 per share.  Dividend growth appears to have slowed in recent years.  The compound annual dividend growth rate is as follows:

                Ten years: 10.5%

Five years: 14.9%

                Three years: 7.9%

With the dividend appears to be growing slower earnings, the dividend appears to be sustainable.  Based on net income, the dividend payout ratio has exceeded 50% once in the past five years.  A dividend payout ratio of less than 50% is a positive allowing for sustainable growth and a cushion for short-term earnings volatility.  Below is the dividend payout ratio for the past five years:

                2006: 23.2%

                2007: 25.3%

                2008: 30.2%

                2009: 87.2%

                2010: 39.1%

In the book, The Ultimate Dividend Playbook, Josh Peters discusses a model to calculate a stock’s prospective return.  The model is called the Dividend Drill Return Model (DDRM).  It is based on the premise that the dividend total return is equal to the yield plus dividend growth.  Dividend growth is then broken into core growth (the rate of growth for total profits) plus share change (reduction of shares due to share repurchase). 

Given a core growth rate of 13.0% and current dividend yield of 3.3%, ETN’s cost of growth is $2.87 per share.  After reducing this amount and dividends of $2.20 per share, the funding deficit is $1.46 per share; this amount is forecasted to have a -3.6% impact on share price.  As a result, the DDRM forecasts the projected total return for ETN to be 12.8%.  Below is a breakdown of the total return:

                Core growth rate: 13.0%

                Dividend yield: 3.3%

                Funding surplus: -3.6%

                Total return: 12.8%

Summary

In a bull case, based on a valuation $40.59, shares are trading at a 0.2% premium to their intrinsic value.  In a bear case, base on a valuation of $23.92, shares are trading a 70.0% premium to their intrinsic value.  ETN has a history of dividend increases and the dividend appears semi-sustainable as the payout ratio is less than 50%.  Based on the DDRM, the projected total return for ETN is 12.8%.

Disclosure: I am not long ETN.

3M (MMM) - Valuation Analysis

Description

3M Company (3M) is a diversified technology company with a presence in industrial and transportation; health care; display and graphics; consumer and office; safety, security and protection services, and electro and communications. 3M manages its operations in six operating business segments: industrial and transportation; health care; display and graphics; consumer and office; safety, security and protection services, and electro and communications. 3M products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a variety of trades in many countries. In February 2011, 3M (industrial and transportation business) announced that it completed its acquisition of the tape-related assets of Alpha Beta Enterprise Co. Ltd. In February 2011, it acquired Hybrivet Systems Inc. In April 2011, it acquired Original Wraps Inc. In July 2011, it acquired Advanced Chemistry & Technology Inc.

Source: Reuters

Valuation

Key assumptions included:

                Terminal growth rate: 3.0%

                Risk-adjusted discount rate: 10.8%

                Cost of sales: 52.0%

                Selling, general, & administrative costs as % of sales: 21.0%

                Research & development as % of sales: 5.5%

                CAPEX as % of sales: 4.0%

                Depreciation as % of sales: 4.5%

                Effective tax rate: 30.0%

                Day sales in receivables: 50

                Day sales of inventory: 82

                Days payable outstanding: 44

At a 12% growth rate (bull case), I estimate the intrinsic value of MMM to be $95.00 per share.  With a risk-adjusted margin of safety of 11.1%, the target purchase price is $84.46 per share.  This is above the $81.22 per share MMM is currently trading at.  At $81.22, MMM is trading at 14.5% below the intrinsic value indicating it is a value in this scenario.

At a 6% growth rate (bear case), I estimate the intrinsic value of MMM to be $79.56 per share.  With a risk-adjusted margin of safety of 15.4%, the target purchase price is $67.30 per share.  This is below the $81.22 per share MMM is currently trading at.  At $81.22, MMM is trading at 2.1% premium to the intrinsic value.

Dividends

MMM pays a quarterly dividend.  From 2001 to 2010, MMM’s dividend has grown from $1.20 per share to $2.10 per share.  The dividend appears to grow slower than earnings and management appears to have an aggressive stock repurchase program.  The compound annual dividend growth rate is as follows:

                Ten years: 6.8%

Five years: 5.7%

                Three years: 3.0%

With the dividend appears to be growing slower earnings, the dividend appears to be sustainable.  Based on net income, the dividend payout ratio has exceeded 50% in the past five years.  A dividend payout ratio of less than 50% is a positive allowing for sustainable growth and a cushion for short-term earnings volatility.  Below is the dividend payout ratio for the past five years:

                2006: 35.7%

                2007: 33.7%

                2008: 40.4%

                2009: 44.8%

                2010: 36.7%

In the book, The Ultimate Dividend Playbook, Josh Peters discusses a model to calculate a stock’s prospective return.  The model is called the Dividend Drill Return Model (DDRM).  It is based on the premise that the dividend total return is equal to the yield plus dividend growth.  Dividend growth is then broken into core growth (the rate of growth for total profits) plus share change (reduction of shares due to share repurchase). 

Given a core growth rate of 12.0% and current dividend yield of 2.7%, MMM’s cost of growth is $2.69 per share.  After reducing this amount and dividends of $2.20 per share, the funding surplus is $0.83; this amount is forecasted to have a 1.0% impact on share price.  As a result, the DDRM forecasts the projected total return for MMM to be 15.7%.  Below is a breakdown of the total return:

                Core growth rate: 12.0%

                Dividend yield: 2.7%

                Funding surplus: 1.0%

                Total return: 15.7%

Summary

In a bull case, based on a valuation $95.00, shares are trading at a 14.5% discount to their intrinsic value.  In a bear case, base on a valuation of $79.56, shares are trading a 2.1% premium to their intrinsic value.  MMM has a history of dividend increases and the dividend appears semi-sustainable as the payout ratio is less than 50%.  Based on the DDRM, the projected total return for MMM is 15.7%.

Disclosure: I am long MMM.

McDonald's (MCD) - Valuation Analysis

Description

McDonald’s Corporation franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve a varied, limited, value-priced menu in more than 100 countries around the world. All restaurants are operated either by it or by franchisees, including conventional franchisees under franchise arrangements, and foreign affiliated markets and developmental licensees under license agreements. The Company and its franchisees purchase food, packaging, equipment and other goods from various independent suppliers. It offers a range of products. Independently owned and operated distribution centers, approved by it, distribute products and supplies to McDonald’s restaurants. s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, Chicken Selects, Snack Wraps, french fries, salads, shakes, McFlurry desserts, sundaes, soft serve cones, pies and cookies.

Source: Reuters

Valuation

Key assumptions included:

                Terminal growth rate: 3.0%

                Risk-adjusted discount rate: 9.6%

                Cost of sales: 60.0%

                Selling, general, & administrative costs as % of sales: 10.0%

                CAPEX as % of sales: 9.0%

                Depreciation as % of sales: 5.3%

                Effective tax rate: 28.0%

                Day sales in receivables: 17

                Day sales of inventory: 3

                Days payable outstanding: 24

At a 10% growth rate (bull case), I estimate the intrinsic value of MCD to be $75.66 per share.  With a risk-adjusted margin of safety of 11.2%, the target purchase price is $67.15 per share.  This is below the $86.28 per share MCD is currently trading at.  At $86.28, MCD is trading at 14.0% above the intrinsic value indicating it is may be overvalued.

At a 5% growth rate (bear case), I estimate the intrinsic value of MCD to be $59.99 per share.  With a risk-adjusted margin of safety of 14.4%, the target purchase price is $51.33 per share.  This is below the $86.28 per share MCD is currently trading at.  At $86.28, MCD is trading at 43.8% above the intrinsic value indicating it may be overvalued in this scenario. 

Dividends

MCD has paid a quarterly dividend since 2008.  Before that, MCD paid an annual dividend.  From 2001 to 2010, MCD’s total annual dividend has grown from $0.23 per share to $2.26.  The dividend appears to be grow faster than forecasted growth.  The compound annual dividend growth rate is as follows:

                Ten years: 29.9%

Five years: 35.5%

                Three years: 14.6%

Although the dividend is growing faster than net earnings, the dividend appears to be sustainable.  Based on net income, the dividend payout ratio has exceeded 50% once in the past five years.  A dividend payout ratio of less than 50% is a positive allowing for sustainable growth and a cushion for short-term earnings volatility.  From 2006 to 2010, the dividend payout ratio based on net income has grown from 34.3% to 48.7%.  Below is the dividend payout ratio for the past five years:

                2006: 34.3%

                2007: 73.7%

                2008: 42.3%

                2009: 49.1%

                2010: 48.7%

In the book, The Ultimate Dividend Playbook, Josh Peters discusses a model to calculate a stock’s prospective return.  The model is called the Dividend Drill Return Model (DDRM).  It is based on the premise that the dividend total return is equal to the yield plus dividend growth.  Dividend growth is then broken into core growth (the rate of growth for total profits) plus share change (reduction of shares due to share repurchase). 

Given a core growth rate of 10.0% and current dividend yield of 2.8%, MCD’s cost of growth is $1.37 per share.  After reducing this amount and dividends of $2.44 per share from earnings per share, the funding surplus is $0.83; this amount is forecasted to have a 1.0% impact on share price.  As a result, the DDRM forecasts the projected total return for MCD to be 13.8%.  Below is a breakdown of the total return:

                Core growth rate: 10.0%

                Dividend yield: 2.8%

                Funding surplus: 1.0%

                Total return: 13.8%

Summary

In a bull case, based on a valuation $75.66, shares are trading at a 14.0% premium to their intrinsic value.  In a bear case, base on a valuation of $59.99, shares are trading a 43.8% premium to their intrinsic value.  MCD has a history of dividend increases, whether annual or quarterly.  The dividend appears sustainable as the payout ratio is less than 50%.  Based on the DDRM, the projected total return for MCD is 13.8%.

Disclosure: I am not long MCD.

Waste Management (WM) - Valuation Analysis

Description

Waste Management, Inc. is a holding company and all operations are conducted by its subsidiaries. The Company is a provider of waste management services in North America. Its subsidiaries provide collection, transfer, recycling and disposal services. The Company is also a developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the United States. The Company manages and evaluates its operations through five groups. The Company’s four geographic operating groups, consisting of its Eastern, Midwest, Southern and Western Groups, provide collection, transfer, disposal and recycling services. Its fifth Group is the Wheelabrator Group, which provides waste-to-energy services, and manages waste-to-energy facilities and independent power production plants (IPPs). In January 2010, the Company acquired City Wide Recycling LLC.

Source: Reuters

Valuation

Key assumptions included:

                Terminal growth rate: 3.0%

                Risk-adjusted discount rate: 9.6%

                Cost of sales: 72.0%

                Selling, general, & administrative costs as % of sales: 11.7%

                CAPEX as % of sales: 10.0%

                Depreciation as % of sales: 9.0%

                Effective tax rate: 28.0%

                Day sales in receivables: 48

                Day sales of inventory: 5

                Days payable outstanding: 28

At a 10% growth rate (bull case), I estimate the intrinsic value of WM to be $36.94 per share.  With a risk-adjusted margin of safety of 9.9%, the target purchase price is $33.27 per share.  This is above the $30.73 per share WM is currently trading at.  At $30.73, WM is trading at 16.8% below the intrinsic value indicating it is a value in this scenario.

At a 5% growth rate (bear case), I estimate the intrinsic value of WM to be $29.97 per share.  With a risk-adjusted margin of safety of 13.7%, the target purchase price is $25.87 per share.  This is below the $30.73 per share WM is currently trading at.  At $30.73, WM is trading at 2.5% above the intrinsic value indicating it may be overvalued in this scenario. 

Dividends

Waste Management has paid a quarterly dividend since 2005.  From 2005 to 2010, WM’s dividend has grown from $0.80 per share to $1.26.  The dividend appears to be grow in line with forecasted earnings.  The compound annual dividend growth rate is as follows:

                Five years: 12.0%

                Three years: 9.5%

Although the dividend appears to be growing in line with earnings, the dividend appears to be sustainable.  Based on net income, the dividend payout ratio has exceeded 50%.  A dividend payout ratio of less than 50% is a positive allowing for sustainable growth and a cushion for short-term earnings volatility.  From 2006 to 2010, the dividend payout ratio based on net income has grown from 41.4% to 63.4%.  Below is the dividend payout ratio for the past five years:

                2006: 41.4%

                2007: 42.6%

                2008: 48.9%

                2009: 57.2%

                2010: 63.4%

In the book, The Ultimate Dividend Playbook, Josh Peters discusses a model to calculate a stock’s prospective return.  The model is called the Dividend Drill Return Model (DDRM).  It is based on the premise that the dividend total return is equal to the yield plus dividend growth.  Dividend growth is then broken into core growth (the rate of growth for total profits) plus share change (reduction of shares due to share repurchase). 

Given a core growth rate of 10.0% and current dividend yield of 4.4%, WM’s cost of growth is $1.37 per share.  After reducing this amount and dividends of $1.36 per share, the funding gap is $0.75; this amount is forecasted to have a -2.4% impact on share price.  As a result, the DDRM forecasts the projected total return for WM to be 12.0%.  Below is a breakdown of the total return:

                Core growth rate: 10.0%

                Dividend yield: 4.4%

                Funding surplus: -2.4%

                Total return: 12.0%

Summary

In a bull case, based on a valuation $36.94, shares are trading at a 16.8% discount to their intrinsic value.  In a bear case, base on a valuation of $29.97, shares are trading a 2.5% premium to their intrinsic value.  WM has a short history of dividend increases and the dividend appears semi-sustainable as the payout ratio is more than 50%.  Based on the DDRM, the projected total return for WM is 12.0%.

Disclosure: I am long WM.

Investment Guidelines - Version 1

Objective

The first objective is to invest in companies that will generate a higher dividend yield than the current ten-year Treasury yield, with a second objective for capital appreciation so the annual return for the portfolio outperforms the total return of the S&P 500.

Investments will be primarily made in U.S.-based companies that are considered either large-cap or mid-cap.

Strategy

The primary strategy is to acquire shares of companies that are considered undervalued using a discounted cash flow (DCF) model.  Companies must pay a sustainable dividend and the company must demonstrate a history of increasing dividends.  Fundamental analysis for the company will be performed and the firm must demonstrate a durable competitive advantage.

Initial positions will be established by:

1.       Company must demonstrate a durable competitive advantage.

2.       If a company demonstrates a durable competitive advantage, shares must currently be trading below the intrinsic value with a risk-adjusted margin of safety. 

Ideally, positions will be held indefinitely to avoid transaction costs (i.e. taxes).  Once shares of the company reach their intrinsic value, analysis will be performed to see if any fundamental factor has changed to force a sale of the position and to see if the intrinsic value of the company is higher than originally calculated.  If the fundamentals remain intact, the position will continually be held.  If the fundamentals do not remain intact, the position will be sold.

Allocation

The portfolio will be primarily held in equities and cash.  Portfolio can be invested in up to 90% equities at any given time.  Cash may not exceed 90% at any given time.

Positions will not be allowed to exceed 10% of the total portfolio value at the time of purchase.

Company selection

Fundamental analysis will be completed before any position is added to the portfolio.  This includes:

1.       Analysis to determine does the company demonstrate a durable competitive advantage as indicated by the income statement, balance sheet, and cash flow statement

2.       The purchase price must be less than the current trading price and include a risk-adjusted margin of safety.  The risk adjusted margin of safety will be calculated as follows:

Margin of safety                   30%

x business risk                      1.00   (constraints 0.8<x<1.2)

x financial risk                      1.00   (constraints 0.8<x<1.2)

Risk-adjusted margin of safety

3. Any investment must have a yield higher than the current yield of the ten-year Treasury

Praxair Inc. (PX) - Valuation Analysis

Description

Praxair, Inc. (Praxair) is an industrial gas supplier. Praxair’s primary products for its industrial gases business are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). It also designs, engineers, and builds equipment that produces industrial gases for internal use and external sale. Its surface technologies segment, operated through Praxair Surface Technologies, Inc. Praxair serves approximately 25 industries, such as healthcare and petroleum refining; computer-chip manufacturing and beverage carbonation; fiber-optics and steel making; and aerospace, chemicals and water treatment. During the year ended December 31, 2010, 94% of revenue was generated in four geographic segments (North America, Europe, South America and Asia). As of December 31, 2010, it had acquired a 49% interest in Refrigeration and Oxygen Company Limited (ROC).

Source: Reuters

Valuation

I estimated the intrinsic value of PX to be $77.05.  Key assumptions included:

                Core growth rate: 12.4%

                Terminal growth rate: 5.0%

                Risk-adjusted discount rate: 10.2%

                Cost of sales: 66.0%

                Selling, general, & administrative costs as % of sales: 12.0%

                Research & development as % of sales: 1.0%

                CAPEX as % of sales: 14.0%

                Depreciation as % of sales: 9.0%

                Effective tax rate: 28.0%

                Day sales in receivables: 60

                Day sales of inventory: 22

                Days payable outstanding: 45

Given the current market price of $102.51, PX is overvalued by 33.0% to its intrinsic value.  The risk-adjusted margin of safety was calculated to be 10.5%.  Since the actual margin of safety (-33.0%) is less than the risk-adjusted margin of safety (10.5%), this indicates PX is overvalued and should be purchased at a lower price per share.

Dividends

The dividend appears to be growing faster than earnings growth, but has slowed in recent years.  From 2000 to the 2010, the dividend has grown from $0.31 per share to $1.80 per share.  The compound annual growth rates for the past ten-, five-, and three-years are:

                Ten years: 21.6%

                Five years: 25.7%

                Three years: 14.5%

Although growing faster than earnings, the dividend appears to be sustainable.  Based on either net income or free cash flow, the dividend payout ratio has not exceeded 50%.  A dividend payout ratio of less than 50% allows for sustainable growth and a cushion for short-term earnings volatility.  From 2006 to 2010, the dividend payout ratio based on net income has increased from 32.7% to 46.1%.  Below is the dividend payout ratio for the past five years:

                2006: 32.7%

                2007: 32.4%

                2008: 38.6%

                2009: 39.2%

                2010: 46.1%

In the book, The Ultimate Dividend Playbook, Josh Peters discusses a model to calculate a stock’s prospective return.  The model is called the Dividend Drill Return Model (DDRM).  It is based on the premise that the dividend total return is equal to the yield plus dividend growth.  Dividend growth is then broken into core growth (the rate of growth for total profits) plus share change (reduction of shares due to share repurchase). 

Given a core growth rate of 12.4% and current dividend yield of 2.0%, PX’s cost of growth is $2.48 per share.  After reducing this amount and dividends of $2.00 per share, the funding gap is $0.59.  PX will need to borrow an additional $0.59 for any additional cash deployment items like share repurchase.  Ths amount is forecasted to have a (0.6%) impact on share price.  As a result, the DDRM forecasts the projected total return for UTX to be 13.8%.  Below is a breakdown of the total return:

                Core growth rate: 12.4%

                Dividend yield: 2.0%

                Funding surplus: -0.6%

                Total return: 13.8%

Summary

Based on a valuation $77.05, shares are trading at a 33.0% premium to the intrinsic value.  PX has a history of dividend increases that grow faster than earnings and the dividend appears sustainable as the payout ratio is less than 50%.  Based on the DDRM, the projected total return for PX is 13.8%. 

Disclosure: I have no positions in Praxair (PX), and no plans to initiate any positions within the next 72 hours.

Union Pacific (UNP) - Valuation Analysis

Description

Union Pacific Corporation, incorporated in 1969, is engaged in the transportation business. The Company’s principal operating company, Union Pacific Railroad Company, links 23 states in the western two-thirds of the United States of America. Union Pacific Railroad Company serves many United States population centers and provides them with mode of freight transportation. Union Pacific Railroad Company’s business mix includes Agricultural Products, Automotive, Chemicals, Energy, Industrial Products and Intermodal. The Company has 31,953 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and the eastern United States gateways and providing several corridors to key Mexican gateways. It serves the western two-thirds of the United States and maintains coordinated schedules with other rail carriers to move freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada and Mexico.
Source: Reuters

Valuation

I estimated the intrinsic value of UNP to be $99.37.  Key assumptions included:

                Core growth rate: 17.0%

                Terminal growth rate: 5.0%

                Risk-adjusted discount rate: 11.1%

                Operating ratio: 70%

                CAPEX as % of sales: 15.0%

                Depreciation as % of sales: 9.0%

                Effective tax rate: 36.0%

                Working capital as % of sales: -7.5%

Given the current market price of $102.20, UNP is overvalued by 2.9% to its intrinsic value.  The risk-adjusted margin of safety was calculated to be 8.3%.  Since the stock is trading above the estimated intrinsic value, it would be prudent to wait until shares of UNP fell.  Based on the $99.37 intrinsic value and 8.3% risk-adjusted margin of safety, it might be prudent to consider shares at $91.14 or below.

Dividends

The dividend appears to be growing faster than earnings growth and has increased in recent years.  From 2000 to the 2010, the dividend has grown from $0.40 per share to $1.31 per share.  The compound annual growth rates for the past ten-, five-, and three-years are:

                Ten years: 14.1%

                Five years: 21.6%

                Three years: 20.7%

Although growing faster than earnings, the dividend appears to be sustainable.  Based on either net income, dividend payout ratio has not exceeded 50%.  A dividend payout ratio of less than 50% is a positive allowing for sustainable growth and a cushion for short-term earnings volatility.  Below is the dividend payout ratio for the past five years:

                2006: 20.0%

                2007: 19.6%

                2008: 20.6%

                2009: 28.8%

                2010: 21.7%

In the book, The Ultimate Dividend Playbook, Josh Peters discusses a model to calculate a stock’s prospective return.  The model is called the Dividend Drill Return Model (DDRM).  It is based on the premise that the dividend total return is equal to the yield plus dividend growth.  Dividend growth is then broken into core growth (the rate of growth for total profits) plus share change (reduction of shares due to share repurchase). 

Given a core growth rate of 17.0% and current dividend yield of 1.9%, UNP’s cost of growth is $6.06 per share.  After reducing this amount and dividends of $1.90 per share, the funding gap is $2.38.  UNP may need to borrow the $2.38 per share to reduce outstanding shares or increase expansion; this amount is forecasted to have a -2.3% impact on share price.  As a result, the DDRM forecasts the projected total return for UTX to be 16.5%.  Below is a breakdown of the total return:

                Core growth rate: 17.0%

                Dividend yield: 1.9%

                Funding surplus: -2.3%

                Total return: 16.5%

Summary

Based on a valuation $99.37, shares are trading at a 2.9% premium to the intrinsic value.  UNP has aggressively increased dividends and the dividend appears sustainable as the payout ratio is less than 50%.  Based on the DDRM, the projected total return for UNP is 16.5%.  Shares of UNP look attractive at lower prices than where UNP is currently trading at.