Investing In Railroad Dividend Stocks
A couple days ago I wrote an article highlighting the railcar industry and several dividend stocks worth considering in that sector. Many of the railcar stocks are experiencing back orders for their railcars as railroad lines look to upgrade and expand their aging fleet. The railcar dividend stocks such as TRN and ARII are especially interesting as they are experiencing great demand for their oil and gas railcars to meet the demand of the ever growing fracking boom being experienced in North America. It seems that rail is the transport mode of choice for this commodity. Today, I’ll be discussing the various dividend paying railroad companies and provide an overview of each one.
First up, is one of the largest railroad companies around by market cap, Union Pacific Corporation (UNP). This stock currently pays a dividend yield of 2.00% with a moderately low payout ratio of 36.2% based on its current EPS of $5.53. Growing its dividend for the last four years, UNP also has a very impressive ten year annualized dividend growth rate of 19.58%. On the valuation side of things, UNP is slightly expensive relative to the S&P but in line with industry peers at 21.60. Forward PE looks much better at 16.65 suggesting share price has run a little ahead of earnings as of late.
Next, is the Canadian railroad stalwart Canadian National Railway Company (CNI). Currently yielding 1.40% with a moderately low payout ratio of 29.9% based on an EPS $3.34, CNI also has a very impressive ten year annualized dividend growth rate of 17.32%. From a PE standpoint, CNI appears to be a little pricey at current levels at 24.06 but like UNP, the forward PE for this one is a much more attractive 17.03. Though very popular among the dividend blogging community, you might want to wait before you pull the trigger on this one.
Another popular railroad dividend stock among the dividend bloggers is Norfolk Southern Corporation (NSC). NSC currently yields 2.20% with a moderately low payout ratio of 35.4% based on an EPS $6.44. Having raised its dividend for the last four years like UNP, NSC also has an awesome ten year annualized dividend growth rate of 21.13%. I think I’m starting to notice a trend here about these impressive dividend growth rates with the railroad stocks. On the valuation side of things, NSC looks to be on the cheaper side of things relative to industry peers at 18.17 with a forward PE of 14.36. Have share prices been lagging on this one and is NSC a better value relative to other railroad stocks?
Going down the line of decreasing market cap is also dividend blogger favorite, CSX Corp. (CSX). Having a relatively attractive yield like NSC of 2.20% with a moderately low payout ratio of 34.4% based on an EPS $1.86, CSX has plenty of room to continue dividend payments with future increases in sight. The ten year annualized dividend growth rate for CSX is an amazing 24.36%. Like NSC, the valuation of CSX looks a lot more attractive than its peers with a PE 17.39 and a forward PE of 14.54. It seems that from a strict PE perspective the best values, yield and dividend growth can be found with CSX and NSC. Of course, a four star rating for CSX from Morningstar doesn’t hurt either.
Finally, the smallest of the railroads featured today is Kansas City Southern (KSU). KSU currently yields a low 1.00% with a low payout ratio of 23.8% based on an EPS of $4.71. Having resumed its regular dividend payment in 2012 after a long halt going back to 1999, KSU, on a PE basis is the most expensive of the bunch with a PE of 36.72. Forward PE looks slightly better at 20.74 but still more expensive than its peers suggesting share price has run way ahead of earnings on this one.
Clearly, the railroad sector has a lot going for itself. Increased demand for their transport services in a growing economy coupled with a new oil and gas boom has made these companies very profitable in recent years. Each company featured pays a dividend with low payout ratios that leaves more than enough room for future payments and dividend growth. With the exception of KSU that halted its dividend in 1999 only to resume in 2012, each of the other railroad companies have experienced a tremendous annualized dividend growth rate going back at least ten years. It’s no secret the railroad sector is booming for the above reasons mentioned and that in 2009 Warren Buffett’s Berkshire Hathaway purchased wholly BNSF, the second largest railroad behind UNP.
Addendum: Not to offend our Canadian friends up north I wanted to also mention briefly Canadian Pacific Railway Limited (CP). Offering a very low yield of 0.70% with a very low payout ratio of 15.1% based on an EPS of $7.97, CP has a ten year annualized dividend growth rate of 13.33%. This stock definitely has room for future dividend increases. Expensive on the valuation side of things with a PE of 42.39 forward PE looks much more attractive at 18.68. You might want to wait on this one a bit.
What do you think about the railroad sector? Are any of the companies mentioned on your watch list or in your portfolio? Please let me know below.
Disclosure: Long NONE
17 thoughts on “All Aboard The Dividend Train Part 2”
I took a close look at these railroads last year and decided to go with CSX through the drip. There was more value at the time compared to UNP and was equally valued to NSC. So far I’ve been happy with the stock and continue to slowly build a position with regular purchases and reinvesting the dividends. My next rail stock may be a rail car stock as mentioned in part one.
Thanks for sharing your railroad holdings. It seems that CSX and NSC still present the best values relative to the other stocks mentioned while both experiencing tremendous dividend growth as well. Personally, when I started building my portfolio I never even considered anything railroad/car and based on the nice gains each has achieved I feel I missed out on this great sector as I focused on consumer staples and industrial stocks instead. Can’t complain though. Thanks for stopping by.
Personally, I’m a fan of both CSX and NSC, and would consider adding both to my portfolio. Certainly, they are the most reasonably valued and likely continue to grow their dividends as they have the past ten years. I am going to be making a few additional purchases in the next couple of months, and they are on my watchlist should their valuations hold strong. Growth can easily outweigh yield when looking at 20% growth rates.
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It seems that CSX and NSC are the more popular choices these days for the railroad sector. I think you will find that, as mentioned in the article, these two are among some of the favorite railroad companies among the dividend bloggers. While it’s true that these stocks all had great ten year dividend growth rates, you must look forward and decide if these companies can keep up their incredible dividend growth rate streak going. The way the industry has been shaping up, especially in the last five years or so, suggests a lot more growth ahead for the railroad and railcar sectors. I appreciate your comment.
Nice overview, DivHut. I have NSC and CNI on my watchlist and want to add some. I dont have any railroads in my portfolio. Another note on CNI is that the railroad has a huge investment from Bill Gates’ investment fund – Cascade Investment.
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Glad you enjoyed the railroad overview. Though there are many great railroad companies out there, the same few names keep popping up on peoples’ radar, CSX, NSC and CNI. I guess it doesn’t hurt that Bill Gates’ investment fund has a large investment in CNI either. Looks like pal Warren Buffett had some influence with that investment as he took over BNSF. Thanks for sharing your watch list with us and time we’ll see if you end up pulling the trigger on any of the railroad companies mentioned. It’s definitely a sector I overlooked for too long.
Great overview, I’ll have to take a closer look at some of these companies in the future. CNI is looking quite interesting.
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Glad this overview got you think about this sector a bit. I wish I would have looked at the rails a few years back. I don’t think the train has fully left station yet, but after five years of great share price and dividend growth, it would have been nicer to be on board already. Thank you for stopping by.
I’ve had CSX on my watchlist since 2009, but I really didn’t know what I was doing back then and never picked any up. We were in Flagstaff, AZ this past summer and every 5 minutes or so a huge BNSF train rolled by. I dug around a bit and found the Berkshire bought it a while back. Didn’t think to pull the trigger on another rail company.
Like you, the railroad sector is one investment category that I ignored far too long. The last five years or so has seen a tremendous rebound with the railroads as economic activity picked up and the oil and gas boom created a great demand for commodity transport. Though I haven’t pulled the trigger yet on any company in the railroad/car sector, many companies do look compelling. Thank you for stopping by and commenting.
They are a steady business but the yield does not attract many investors. If they increased the payout ratio I am sure there will be more on board lol. As efficiency increases I can see the industry growing especially with rising fuel costs and congested roadways. Might be worth getting into some major players with forward thinking soon enough.
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Granted the yield is no where near an attractive 3.5% or more, the railroad companies do have something going for them, tremendous dividend growth rates. I realize as dividend investors we are attracted, sometimes like moths to a flame, to high yield. However, many of the rail companies still offer great growth opportunities and as such current yield suffers a bit. As always I appreciate your comment.
CNR.to is on my watchlist for sure but like you said, at a p/e of 24 I’m still waiting to jump aboard… 🙂
Have a nice day
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Thanks for sharing your intentions in the rail space. NSC and CSX seem to be the popular choices currently. I don’t have any rail stocks in my portfolio and with 39 holdings already I’m not convinced yet about jumping on board. Thank you for stopping by,
DiveHut – Nice work on your reviews in this sector…we have NSC and CSX on our watchlist. Both offer a great P/E and dividend growth rate while maintaining a low payout ratio. Not much to complain about these two. Definitely would consider owning them at some point. Thanks for sharing…enjoyed your articles as always!
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Happy to hear you are enjoying my articles. After writing about the rail sector it really hit me that I missed the boat on many great companies in this space. I’m not complaining about my portfolio or anything it just hurts a little that I missed the boom in the railroad sector as it has been experiencing great growth for the last 4 or 5 years. Can’t buy everything. I appreciate your comment.