Friday, March 9, 2012

Stock Analysis: Norfolk Southern

Norfolk Southern Corporation (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 every for 11consecutive years.

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

Over the past decade this dividend growth stock has delivered an annualized total return of 17% to its shareholders.
The company has managed to deliver an 18.50% 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 /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.
The company’s return on equity has increased from 7.50% in 2002 to 18.60% 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 21.30% 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 we see that 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.
Currently Norfolk Southern is attractively valued at 12.80 times earnings, has a sustainable dividend payout and yields 2.70%. I would consider initiating a position in this railroad on dips and subject to availability of funds.

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