Thursday, January 26, 2012

Dividends In Railroads

What do you think of when you think of railroad companies? You probably think of trains hauling coal, industrial goods or agriculture across vast distances of tracks. Although I share those thoughts, I also think of something else: dividends. And, not only do I think of dividends but I think of growing dividends. Let's take a look at a couple of major railroad companies that not only have strong and growing businesses, but are also committed to shareholders through dividend growth.

Union Pacific Corporation (UNP)

Per Morningstar:

Omaha, Neb.-based Union Pacific is the largest public railroad in North America. Operating on 32,000 miles of track in the Western two thirds of the United States, UP's 43,000 employees generated $19.6 billion of revenue in 2011 by hauling coal, industrial products, intermodal containers, agriculture goods, chemicals, and automotive goods. UP owns about one fourth of Mexican railroad Ferromex and derives around $1 billion hauling freight to and from Mexico.

Union Pacific is currently the railroad king. They are the largest railroad in our country and management has done a great job of growing earnings and revenue while maintaining a pretty solid balance sheet.  They are currently attractively priced with a P/E ratio of 16.89 and an entry yield of 2.11%. They have grown dividends for the last 6 years, making them a Dividend Challenger. The 5-year dividend growth rate is 26.3%, which is pretty strong. They have a pretty strong balance sheet, with a debt/equity ratio of 0.5. Although earnings and revenue growth have not been explosive over the last 5 years, due to the economic downturn of 2008-2009, as the general economy recovers so will the railroad business. I don't think UNP is the most attractively valued railroad play out there, but it's the biggest company in this business and the dividend growth is very strong.

Norfolk Southern Corp. (NSC)

Per Morningstar:

Norfolk Southern is a $9.5 billion railroad operating in the Eastern United States. On 21,000 miles of track, Norfolk Southern hauls shipments of coal (29% of consolidated revenue), intermodal traffic (19%), and a diverse mix of automobile, agriculture, metal, chemical, and forest products (each 7%-14%).

Norfolk Southern is a much smaller railroad company than UNP. But, I think the valuation is more attractive here. NSC has had recent weakness in the share price, and due to such I recently entered into a position with NSC. The current P/E ratio is 13.80 and has an entry yield of 2.5%. They have grown dividends for the last 10 years, with a 5-year DGR of 19.5%. Although earnings and revenues have been relatively flat over the last 5 years, much like UNP, I think the overall improvement in the economy will bode well for this company and industry as a whole. The balance sheet is decent, with a debt/equity ratio of 0.7. They have shown commitment to growing the dividend, raising it twice in the last year, recently raising it by 9.3%, from $0.43 quarterly to $0.47 quarterly. I think investors are seeing an opportunity with NSC, and it was down as much as 2.5% earlier today and compelled me to enter in to a position with this company.

What about you? Own any railroad companies?

Full Disclosure: I'm long NSC

Thanks for reading.

This article was written by Dividend Mantra. If you enjoyed this article, please consider subscribing to my feed.

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