Kansas City Southern
Kansas City Southern (NYSE:KSU) is different from both of our first two railroads in a number of ways.
First off, KSU is a bit smaller, with a market cap of just less than $8 billion, and it brings in roughly $2 billion in revenues. Kansas City Southern also occupies a different part of the country — primarily the central and south central United States, northeastern and central Mexico and the port cities of Lazaro Cardenas, Tampico and Veracruz.
One thing that’s not great: KSU’s dividend yield stands at a fairly paltry 1.1%. Of course, KSU just started paying a dividend in 2011 — it did not declare any cash dividends on its common stock during the prior five years because of a prohibition of stock payouys in its bank credit agreements. Just some food for thought. However, with the restrictions lifted, KSU can hopefully start to generate increasing dividends.
A cash stash of $105 million and cash flow of just over $600 million should support milder dividend increases — but if history repeats itself, recent large outlays into capital expenditures might cut into the dividend concept.
KSU actually has had a great run, trampling the market with 25% gains in the past year. Profits and revenues continued to grow at a great clip in Q2, and earnings are expected to increase in the high teens for the next couple years — and that’s reflected in its somewhat loftier P/E’s. So, while the income aspect isn’t as solid, this might be the little growth engine that could.
Canadian National Railway
Canadian National Railway (NYSE:CNI) boasts the biggest range of these railways, managing 20,000 miles of rail operations connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico. It’s also the largest as measured by market cap, at $37 billion.
Revenues of $9.5 billion are a bit smaller than CSX and NSC, but CNI also sports a huge $2 billion cash flow, and $354 million in cash on hand, so it also is in nice shape for future growth.
Canadian National really shined in its second-quarter report, growing adjusted earnings by almost 20% to comfortably beat estimates, thanks in part to revenues that grew by 13% — and CNI has been able to consistently put up increases in both these areas for three years. Best of all, the company also upgraded its guidance of adjusted EPS growth, from 10% to 15%.
CNI has gained about 20% in the past year, with new highs being set on a nearly weekly basis. The company’s yield isn’t spectacular, at 1.7%, but Canadian National at least has been trying to keep up, growing its payout roughly 80% in the past five years.
CNI seems like a winner to me. Consistent growth, increasing dividend — and it trades at a decent 14 times future earnings? Count me in.
Wait a minute! It appears that at the end of the game, I’ve got myself four railroads.
I guess that makes me bullish on the sector. Just like ol’ Cornelius.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he did not hold a position in any of the aforementioned securities.