Norfolk Southern is a railroad service operating in the Eastern US and in parts of Canada. We tend to forget about railroads, but they do provide us with very important infrastructure for industry and commerce. Transport of coal primarily from mines to power plants accounts for about 31% of NSC’s revenue. Transport of general merchandise (all that crap you and I buy) comprises about 50% of NSC’s revenue. The general merchandise category also includes chemicals and automobiles. NSC serves 24 automobile manufacturing plants. The other 19% of revenues are derived from NSC’s intermodal business, a fancy term for standardized containers.
Basic Company Stats
- Ticker Symbol: NSC
- PE Ratio: 12.15
- Yield: 3.0%
- 5 year revenue growth (2007-2011): 4.3%
- % above 52 week low: 49.2%
- Beta: 1.06
- Market cap: $19.2B
- Website: www.nscorp.com
NSC vs the S&P500 over 10 years
NSC has been delivering solid capital gains for investors over the last 10 year period. By the end of 2012 an investment in NSC would have risen by 200%, compared to just over 50% for the S&P500.
Earnings Per Share (EPS) & Dividend Growth
- 5 year EPS growth: 5.0%
- 10 year EPS growth: 20.2%
- 5 year dividend growth: 12.3%
- 10 year dividend growth: 23.0%
EPS took a hit in 2009, but has bounced back. EPS remains substantially higher than the dividend payout, leaving lots of room for continued dividend growth. The 5 year EPS growth has lagged the 5 year dividend growth, but the 10 year EPS and dividend growth rates are about equal.
As the economy recovers, EPS growth may increase given that about 70% of NSC’s revenues come from transporting consumer goods or the raw materials used to make those goods. Another potential benefit to NSC’s earnings would be rising fuel prices, which would make NSC more competitive vs long haul trucking.
With a dividend growth rate of 12.3% and a current yield of 3.2%, NSC’s yield on cost will grow to about 9.2% after 10 years.
With the exception of 2009, NSC’s payout ratio has remained below 40%. The payout ratios for 2010, 2011, and 2012 have been between 34% and 35%. The average payout ratio over the last 10 years has been 29%. The lower the payout ratio, the more available cash that the company has to continue to increase dividends or make capital investments.
Cash Secured Puts
Given that NSC is in the middle of it’s 52 week range, I’m hesitant to sell long-term puts against it. But if the economy keeps moving upwards, these might not be a bad option.
Competition-wise, railroads are an oligopoly, so they don’t really compete with other railroad companies. But that doesn’t mean that there isn’t competition for shipping. Goods can be shipped sea, by long haul trucking, or by pipeline. If fuel prices rise, it is likely that rail shipping will become more in demand. If fuel prices drop, then trucking becomes more competitive. Over the short-term, I don’t know what will happen with fuel prices, but over the long term, these prices will probably trend upwards, creating increased demand for rail shipping.
NSC has been investing heavily in its intermodal (shipping containers) transport business. If economic conditions continue to improve, then there will be a greater demand for consumer good and more use of railways.
Also, as companies attempt to reduce their carbon footprint they may begin to favor rail use over trucking. However, most of the chatter about carbon footprints is just that, chatter. The main driver of increased rail use will be fuel prices.
I like NSC. I think it is currently undervalued, has a respectable entry yield, a low PE ratio, and a low payout ratio with plenty of room for dividend growth. I would consider adding shares of NSC to my portfolio.
Disclaimer: I am currently short on NSC (one outstanding long term put).
Readers: What are your opinions about Norfolk Southern?