As a Dividend Growth Investor I'm always interested in companies that can continue to increase their dividends despite the overall economy. Norfolk Southern is a company that has done exactly that. I also like trains, and Norfolk Southern is a company that's primarily engaged in rail transportation of raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest. They also offer the most extensive intermodal network in the eastern half of the United States.
- Total traffic volume increased 3% in 2013 despite a decline of 5% in coal shipments
- Intermodal traffic increased 6% driven by increases in both domestic and international business
- Merchandise volume increased 4% as chemicals and automotive had significant gains
- Launching the congressionally mandated positive train control nationwide is going to be expensive and complex
- The company faces high levels of scrutiny over the transport of hazardous materials.
Norfolk Southern Corporation (NSC), together with its subsidiaries, is engaged in the rail transportation of raw materials, intermediate products, and finished goods. As of December 31, 2013, it operated approximately 20,000 miles of road in 22 states and the District of Columbia. The company also operates scheduled passenger trains; transports overseas freight through various Atlantic and Gulf Coast ports; and provides logistics services. In addition, it provides bimodal truckload transportation services primarily utilizing RoadRailer trailers, a hybrid technology that facilitates over-the-road and on-the-rail transportation in the eastern United States, as well as in Ontario and Quebec through a network of terminals. Further, the company is engaged in the acquisition, leasing, and management of coal, oil, gas, and minerals; development of commercial real estate; telecommunications; and leasing or sale of rail property and equipment. The company is founded in 1883 and is based Norfolk, Virginia. (Daily Chart) (Weekly Chart)
26 April 2014
1yr Target $104.60
1yr Cap Gain 11.24%
1yr Tot Return 13.53%
5yr DGR 10.37%
3yr DGR 12.39%
Payout Ratio 34%
EPS (ttm) $6.04
EPS next yr $7.22
Since the 1820s, hundreds of railroad companies were built, merged, reorganized, and consolidated into what eventually became Norfolk Southern, itself created from the consolidation of Southern Railway and Norfolk and Western Railway in 1982. In 1999, Norfolk Southern expanded again by acquiring a portion of the Consolidated Rail Corporation (Conrail).
At the end of 2012, transporting coal, coke, and iron ore made up 26% of the total operating revenue of Norfolk Southern. These are some of the commodities that are under considerable regulatory pressure from the current administration and various environmental groups around the country. Any reduction in the use of coal by electric generating companies will continue to reduce the freight carried by the company and will affect further revenues of Norfolk Southern Corporation. The general merchandise product category (automotive, chemicals, metals, construction materials, agriculture commodities, consumer products, paper, clay, and forest products) made up the largest portion at 54%, and finally intermodal shipments made up the remaining 20% of the total.
Except for those few years, revenues have continued to move upward and estimates going forward continue to increase in 2014 (4.00%) and 2015 (5.64%). This rate of increase is consistent with the company's 3-year revenue growth rate (5.67%) and its 10-year revenue growth rate (5.69%).
Earnings have been on a similar trajectory during this same period. Just like revenues, earnings estimates increase in 2014 (4.13%) and then accelerate in 2015 (14.46%). This rate of increase is consistent with its 3-year earnings growth rate (14.56%) and its 10-year earnings growth rate (15.99%).
Dividends have been growing at a rate of 12.38% over the last three years and at a rate of 20.96% over the last 10 years. Looking closer at the dividend growth rates for the 4-year and 5-year periods it's evident that the dividend is increasing at a rate close to the more recent slower growth rate than the rate of 10 years ago. Assuming that this current growth rate will continue into the next few years, estimates for dividends in 2014 are $2.32 and in 2015 are $2.59 per share. Dividends increasing at this rate are obviously far in excess to the current rate of inflation and are the kind of numbers all Dividend Growth Investors are looking for.
As a result of that 2008-2010 recession in the US occurring in the timeframe that affects the 5-year growth rates, I've also included the 4 year growth rates. It demonstrates the anomaly that occurred during this period and allows for a better understanding of the affect of the economic conditions on the revenues and earnings of the company. It's nice to know that management was able to steer the company through these difficult times and recover nicely afterwards. In addition, management was smart enough to keep the dividend payout ratio low enough to allow for a continually increasing dividend throughout this entire period. These are the kind of intangibles that can't always be gleaned from the numbers themselves and they provide an investor with a certain level of confidence in the management and the board of directors of the company.
Revenue Growth Rates
3yr = 5.67% 4yr = 9.00% 5yr = 1.16% 10yr = 5.69%
Earnings Growth Rates
3yr = 14.56% 4yr = 21.62% 5yr = 5.96% 10yr = 15.99%
Dividend Growth Rates
3yr = 12.38% 4yr = 11.20% 5yr = 10.37% 10yr = 20.96%