Railroad to Dividends

Published Tue, 5 Mar 2013 12:00 CET by TopYields.nl

The US freight rail network is a dynamic and robust $60B industry consisting of 140,000 rail miles operated by 7 Class I railroads, 21 regional railroads and 510 local railroad companies. With an average of 40 Tons of freight per person per year, and railroad being a major carrier of freight (nearly 40%), the industry is expected to grow with the population and economy of the country (source: Federal Railroad Administration).

US Rail Freight Figure
Importantly, more than 40% of the tonnage carried in the industry comprises of coal. An expected uptrend in prices of natural gas is likely to increase the demand for coal, thereby having a positive effect on the amount of coal carried by rail over the next few years. This is likely to augur well for prospects of the industry which has traditionally commanded good pricing power due to the cost advantage it offers over other modes of goods transportation (source: Association of American Railroads). Based on this, some railroad companies which have modest, but consistent dividend payment records are discussed below.

US Rail Freight Figure
Incorporated in 1980, Norfolk Southern (NYSE: NSC) is a Norfolk, Virginia based company that operates through its subsidiary Norfolk Southern Railway Company and is primarily engaged in the rail transportation, overseas freight, logistics services and intermodal network business. In its railroad business, it operates approximately 20,000 route miles in 22 States and the District of Columbia. The revenue and net income in 2012 were $11.04B and $1.75B respectively with the figures for 2009 being $7.97B and 1.03B (a growth of 38.5% and 69%). Consequently, the margins expanded from around 13% in 2009 to 15.84% in 2012. The dividend per share has grown by 43% since 2009 and the yield is 2.7% (5 year average of 2.6%). The payout ratio is 36%, with the institutions holding around 66% stake in the company. The stock price has appreciated by about 9% over the last year.

CSX (NYSE: CSX), incorporated in 1978, provides rail-based transportation services, including traditional rail service and transport of intermodal containers and trailers. The rail network is 21,000 route miles and serves centers in 23 States east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The company had a revenue of $11.76B in 2012 with the net income being $1.86B. Corresponding figures for 2009 were $9.04B and $1.14B indicating a growth in revenue and net income of 30% and 63%, respectively. The net profit margin expanded from 12.6% to 15.8% during the same period. The dividend has grown by 86% since 2009 with the yield in 2012 being 2.4% (5 year average of 2.2%). The payout for 2012 was 30% and institutions are holding a 68% stake in the company. The stock has risen 12% over the past year.

Union Pacific (NYSE: UNP), a 150 year old iconic company, owns transportation companies, with its principal operating company being Union Pacific Railroad Company. It is North America’s premier railroad franchise, covering 23 States across the western two-thirds of the United States with more than 31,900 route miles. UNP has been a consistent performer over the years and in 2012 it clocked a revenue of $19.69B with a net income of $3.94B. In 2009 these figures were $13.37B and $1.89B respectively, a growth of 47% and 109%. The margins expanded from 14% in 2009 to 20% in 2012. The DPS has grown from $1.08 to $2.49 (130% growth) during the same period and yield is 1.9% against a 5 year average of 2%. The payout ratio is 30% and institutions hold more than a 81% stake in the company.

All these companies have been paying quarterly dividends since several years and have shown excellent earnings growth and margin expansion. Importantly, they are majorly held by institutions and have low P/E ratios indicating decent valuations despite recent price uptrend. The payout ratios are extremely healthy and the consistency of dividend payments, though with modest yields, makes them suitable for investing for regular income. The companies have high debt/equity ratios, but this is common for the highly leveraged rail transportation industry. CSX has the best valuations with the lowest P/E ratio, but the D/E ratio is a little too high to be comfortable. NSC has the highest yield with the lowest price to book ratio, but UNP scores on the margins front, has the least debt-equity ratio and the highest earnings growth over the years. The dividend yield of UNP is, however, the lowest amongst the three companies and may ebb further due to the 25% rise in stock price over past 52 weeks. Considering the fact that there is potential for future capital appreciation and stable dividends, the above stocks can be considered for investing for long term dividend benefits.

Stock name Dividend Yield
Norfolk Southern 2.47
Csx 2.32
Union Pacific 2.27

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