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Norfolk Southern Chugs out Steady Dividends

NSC dividend stock analysis shows company's strength


Norfolk Southern (NYSE:NSC), through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. This dividend achiever has paid uninterrupted dividends on its common stock since 1901, and increased payments to common shareholders for 11 consecutive years.

The company’s last dividend increase was in January 2012 when the Board of Directors approved a 9.30% increase to 47 cents per share, marking the second dividend increase over the past year. Norfolk Southern‘s largest competitors include Union Pacific (NYSE:UNP), CSX (NYSE:CSX) and Canadian National Railway (NYSE:CNI).

Over the past decade, this dividend growth stock has delivered an annualized total return of 17% to its shareholders.

The company managed to deliver an 18.5% annual increase in EPS since 2002. Analysts expect Norfolk Southern to earn $5.96 per share in 2012 and $6.71 per share in 2013. In comparison, Norfolk Southern earned $5.45 per share in 2011. The company has managed to consistently repurchase 3% of its outstanding shares on average in each year over the past five years.

A bet on railroads is a bet on the long-term growth of US economy. As the country expands, and as the population grows over the next few decades, the amount of goods that need to be transported will surely increase. Currently, railroads several important advantages over trucks:

  • They are three times more fuel efficient.
  • They can transport certain hazardous materials trucks cannot.

That being said, railways in general will experience cyclicality in earnings during recessions. There are only four major railroads in the U.S., including Burlington Northern Santa Fe (NYSE:BNI), Union Pacific, Norfolk Southern and CSX Corp. Analysts expect railroad transportation volumes to increase by 1.5% per year over the next decade.

For Norfolk Southern in particular, half of revenues come from transporting goods which are sensitive to the economic cycle, such as automobiles and chemicals. Almost one third of revenues are generated by transporting coal to utilities, which is one of the most profitable activities for the company.

The remainder of revenues are generated by the company’s intermodal business, where it competes directly with trucking companies for volume. The company has invested heavily to increase its competitiveness along key freight lanes by adding infrastructure to support the intermodal transportation of goods.

The company’s return on equity has increased from 7.5% in 2002 to 18.6% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 21.3% per year over the past decade, which is higher than to the growth in EPS.

A 21% growth in distributions translates into the dividend payment doubling every three and a half years. If we look at historical data, going as far back as 2001, Norfolk Southern has managed to double its dividend almost every three and a half years on average.

The dividend payout ratio has almost doubled from 22% in 2002 to 39% in 2011. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Norfolk Southern is attractively valued at 12.6 times earnings, has a sustainable dividend payout, and yields 2.8%.

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