Friday, September 28, 2012

Dividend Mantra's Recent Buy - Norfolk Southern (NSC)

Well, to be honest I wasn't planning on purchasing anything else this month. I felt very content with my recent purchases of KMI shares and INTC shares over the past couple weeks. Especially with the stock market so high, I felt I wanted to hold back a little capital to see what October brought us. 

But, when a position of mine takes a dip of almost 10% in one day I tend to take notice. And take notice I did. Today, Norfolk Southern Corp. (NSC), one of the largest railroads in the nation, dropped almost 10% today after it released news yesterday that it expected third quarter earnings well below analysts expectations.

When an investor sees a company's stock sink like NSC did today, and that investor also has skin in the game, they can either panic and mash the SELL button or they can meet opportunity at the door and let it in. I decided on the latter.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 17 shares of Norfolk Southern Corp. (NSC) on 9/21/12 for $65.86 per share. This purchase gave me a 3.04% entry yield on my purchase. This buy will add $34.00 to my annual dividend total based on the current payout of $0.50 per share quarterly. 

NSC is a long-term purchase for me. I don't see railroads going anywhere. I actually see them as a fantastic, and extremely cheap, way to transport goods across the country. Although some analyst have concern over the fall of coal, NSC only derives 31% of their revenue from coal shipments. So, while it's almost a third of revenue, it's not completely overwhelming either. I'm interested in keeping NSC in my portfolio for as long as the company remains fundamentally sound and continues to raise dividends at a pace that exceeds inflation. One quarter of an earnings miss does nothing to tarnish that perspective. 

If you're interested in a stock that raises its dividends, NSC is fantastic in that regard. They raised the dividend twice this year alone, and they have a 10-year DGR of 21.3% with an 11-year track record of rising dividends. They are currently trading for an attractive 11.34 P/E ratio, and a 2.2 P/B ratio. The payout ratio currently stands at 34%, which leaves plenty of room for further dividend growth.

Using the Dividend Discount Model to value the shares using the current dividend payout of $2.00 per share annually, a 8% growth rate for the next 10 years and a 7% terminal rate along with a 10% discount I get a fair value of $77.48 per share. S&P currently has fair value for NSC shares at $72.70. I think the current price offers an attractive long-term entry point, and factor in a mild margin of safety. 

With this purchase I still have 29 positions in my portfolio.

Some analyst opinions on my recent purchase:

*Morningstar currently rates NSC as a 4/5 star valuation.
*S&P currently rates NSC as a 4/5 star Buy.

I'll update my Freedom Fund in early October to reflect my recent addition.

What are you buying?
Thanks for reading.

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