All Aboard The Dividend Train Part 1

Investing In Railcar Dividend Stocks

 

The railroad and railcar industry has a long rich history in North America. Though often thought of as a legacy industry, they are still very important to the modern economy. In fact, the rail network and the trains that operate on that network are more efficient and cost effective than truck transport.

 

The rail industry also provides a general overview of economic health as carload traffic is directly proportional to economic activity. Of course, as dividend investors we are not only interested in the economic prosperity of specific rail industry companies, we also demand a healthy and sustainable dividend. That being said I’d like to highlight specific railroad and railcar dividend stocks in two parts. This article will focus exclusively on the railcar sector while the next blog post will focus on the railroad sector.

 

First up in the railcar sector is Trinity Industries Inc. (TRN). TRN builds a variety of railcars including boxcars, auto carriers, tank cars as well as various railcar parts and components. TRN also manages railcar fleets on behalf of third parties and owns or leases over 75,000 railcars. This is a stock with a low yield of 0.90% and an equally low payout ratio of 9.8%. It’s quite rare to find a payout ratio that is in the single digits which makes the dividend of TRN quite safe and with room to grow based on current cash flow. I know the current yield of TRN is nothing to get excited about especially if you are looking for some current cash flow from your dividends but the ten year annualized dividend growth rate stands at 12.07%. That kind of dividend growth will definitely keep pace with inflation rates. On the valuation side, TRN has a low current PE of 7.29 making it quite cheap relative to the S&P and industry peers.

 

Our next railcar dividend stock is The Greenbrier Companies, Inc. (GBX). Like TRN, GBX designs, manufactures, and markets freight cars, tank cars, solid waste cars, coal cars and more. The company also has a railcar maintenance segment that refurbishes and reconditions wheels, axles and older railcars. Currently yielding a low 0.90%, GBX recently reinstated its dividend this year after suspending it in 2009 because of the weakened economy. Prior to its dividend suspension GBX had relatively low payout ratios under 25% however the need to conserve cash in 2009 preempted any other need of the company. Forward PE for GBX is 17.43. This one is a definite wait and see in terms of profitability and as future dividend payments are concerned.

 

Next up is small cap FreightCar America Inc. (RAIL). As the name suggests, FreightCar America Inc. designs, manufactures, and sells aluminum-bodied and steel-bodied railcars and coil steel cars in North America, Latin America, and the Middle East. RAIL currently yields 1.10% with a relatively low payout ratio of 35.8%. The forward PE for RAIL is 15.48. In general, I do not like to invest in small cap stocks ($328.83M) but I wanted to give a more complete overview of the dividend paying railcar manufacturers.

 

Our last dividend paying railcar stock is American Railcar Industries, Inc. (ARII). ARII, designs and manufactures hopper and tank railcars and provides various railcar servicing solutions. ARII, like TRN also operates a leasing division for its railcars and is currently yielding a relative healthy (compared to the other railcar dividend stocks) 2.30% with a moderately low payout ratio of 35.1%. On a valuation note ARII has a current PE of 18.94 but a more attractive forward PE of 16.58 putting it below the S&P and industry peers alike. One figure that may interest you is the extremely high five year annualized dividend growth rate of ARII which is 52.81%. I’m sure this hyper dividend growth cannot continue for a longer period of time, but clearly this stock has room to continue boosting its dividend for the near term.

 

Clearly, in the railcar sector there are a variety of choices when it comes to finding a stock that hits the dividend sweet spot. You have a low yield, high dividend growth choice with TRN along with a higher yielding and very high growth dividend stock such as ARII and others that fall out of the dividend sweet spot spectrum. Have you ever thought about investing in railcar manufacturers? Let me know below. Next up, we’ll discuss the various dividend paying railroad stocks.

 

Disclosure: Long NONE

20 thoughts on “All Aboard The Dividend Train Part 1

  1. Hi Divhut,

    Thanks for the analysis!

    I’m not on the train yet. As I’m at the start of building my portfolio I feel the urge to start with stocks that have a higher yield than this. Although I agree with you that these companies could potentially show a lot more growth in the future.

    Best wishes.
    DfS
    Dividend for Starters recently posted…Stock analysis – AugustMy Profile

    • Hi DfS,

      I would have to agree with your statement. Though a couple railcar dividend stocks look interesting I would not start out with this industry if I was building out my dividend stock portfolio. Starting with the dividend aristocrats list is probably a better place to look. Remember, it’s not only about current yield. Dividend growth is just as important when making an investment decision. Thank you for stopping by and commenting.

  2. I own some of the actual railroad companies, well one but I’m looking at adding UNP to the mix. But I’ve never looked at the rail car industry. If you’re bullish on rail transport then that’s a great place to look. Especially with the energy boom in the US requiring a lot of materials to be shipped via rail.
    JC @ Passive-Income-Pursuit.com recently posted…Weekly Loyal3 PurchasesMy Profile

    • Hi PIP,

      I’ll be talking about the various dividend railroad companies next as there are quite a few solid dividend payers in that sector. The railcar sector often gets overlooked as the big railroads seem to make the headlines but like you suggest, railcar manufacturing can boom during economic growth times as transport needs increase. And, as you mentioned, the energy sector is relying on rail transport now more than ever. It’s definitely an interesting industry to consider. Thank you for commenting.

  3. Keith,
    Ever look at Canadian National (CNI)? The Motley Fool brothers considered it a core holding in the recent past (not sure if they do now since I dropped my subscription). Maybe that is one you are going to discuss in your next article?
    Thanks,
    KeithX

    • Hi Keith,

      I have started looking at CNI and others for my next post. This article was strictly about the lesser known railcar manufacturers that have a couple interesting picks from my preliminary analysis. The rail industry as a whole seems to be prospering since the market lows of 2009 and the energy boom as of late which relies heavily on rail transport for their goods. Thank you for stopping by.

    • Hi Tawcan,

      Thanks for sharing your rail plays with us. I will be focusing on the railroads in my next post. This article was only about the railcar manufacturers. I know Canada has some solid rail plays too.

    • Hi DD,

      Like all disasters time seems to smooth over the tragic losses. As the very least from my preliminary overview of the railcar sector there seems to be two promising dividend growers and with the energy boom in recent years there is also a greater demand for specific railcars that these featured companies produce. Thank you for stopping by and commenting.

    • Hi LAH,

      I was thinking about mentioning WAB but they are not in the railcar manufacturing business. They produce components for railcars such as brakes and switches. I wanted to focus on the companies that only build the actual railcars. It’s not a bad idea though, just a slightly different business. Thank you for your suggestion.

    • Hi Martin,

      I understand the need for current high yield and these choices do not make the grade. Two of them offer tremendous dividend growth though and might be a consideration if you are looking to grow your dividend over a longer period of time. This would be similar to an investment in V. Thanks for stopping by.

    • Hi Kipp,

      I’ll be discussing those two railroad companies in my next article. However, you shouldn’t discount TRN and ARII. TRN has a huge backlog of orders and the fracking boom coupled with the limited oil pipeline capacity make it economically attractive to transport by rail which is benefiting many railcar companies. Thank you for stopping by and commenting.

  4. Hmm I never really thought about looking at rail road manufactures but I did look in to Railroad Company like Csx, Union Pacific, and Norfolk southern. I will probably add some railroad stocks later on in the future though. Do you plan on investing in the railroad manufacture that you mention in your article?
    the expat investor recently posted…Mid august recent stock purchasesMy Profile

    • Hello expat investor,

      For now, I have no plans to invest in the railroad or railcar sector. In general, both sectors do look interesting as there is a large back order for new railcars which should keep many of the companies mentioned busy for a long time and the tremendous need for new oil/gas railcars to come online to meet the demand of the huge oil boom in North America. Thanks for commenting.

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