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Norfolk Southern (NSC) is a railway company operating about 21,000 miles of rail route miles in 22 eastern and southern states in the United States. In 2012, the company reported around 26% of freight revenue is made of coal, 20% from intermodal, 13% from agriculture, consumer products and government, 12% from construction and 29% other.
Recently, I wrote about how well an investor would have done owning Norfolk Southern over the past 10 or 20 year periods. It turns out this boring old railroad company was quite profitable for investors over those time frames.
This got me interested to do a more in depth analysis of the company.
Dividend Growth and Current Yield
Norfolk Southern currently pays a dividend of $0.54 per quarter for a $2.16 annual dividend. At the close of market on Friday February 7th, NSC’s price per share was $94.74. This gives the stock a current dividend yield of 2.28% (2.16/94.74).
In 2003, Norfolk Southern payed an annualized dividend amount of $1.20 per share. The dividend trend has been up each year as it now pays $2.16 annually per share. This gives NSC a 10 year annual compound dividend growth rate of 6.05%. More recently the annual dividend growth rate was 16.87% for 2011 to 2012 and 5.15% for 2012 to 2013. Recently, NSC announced their second dividend increase in the past year of 3.85% from $0.52 to $0.54 per share. These dividend growth rates should please the owner of Norfolk Southern.
Norfolk Southern has a 13 year dividend growth streak going. The company seems to be raising it’s dividend rate at a pretty decent pace over the past decade.
Earnings Per Share Growth
Norfolk Southern had a 2002 earnings per share (EPS) of $1.18 and a 2012 EPS of $5.37. Over the 10 years their earnings per share have been consistently climbing upward with just one down year coming during the great recession back in 2009. Norfolk Southern has had a 10 year EPS growth rate of 16.36% which is an excellent growth rate for such a large established company.
More recently Norfolk Southern’s annual EPS growth rate was 1.90% from 2011 to 2012 which is a pretty flat growth rate due to lagging coal demands in the U.S. Going forward, Value Line Investment Surveys has projected earnings growth of 9.5% which should be acceptable for most investors.
Net Income Growth
Norfolk Southern has been consistently growing net profits since 2003. NSC has a 9 year net profits growth rate of 14.21%. Most recently Norfolk Southern had a slight decrease in net profits in 2012 by about 5.6% once again due to declining coal demand. While the 2012 and 2013 may be down years for NSC, it appears that analysts expect growth to pick back up in 2014 and should offer investors decent profits.
Sales have also been trending upward for NSC over the past decade. The compound annual growth rate of sales revenues was 6.12%. It appears that NSC has been able to growth EPS and net profits at a slightly higher rate than total revenues. Companies can achieve this type of result by increasing profit margins, lowering expenses and reducing the outstanding share count.
Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company. Norfolk Southern has been decreasing outstanding shares every year since 2005. Along with dividends, Norfolk Southern has been increasing shareholder value through stock repurchases.
With less shares outstanding, the value of each share still available increases. When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits. I like seeing that management has shown a commitment of purchasing back shares and increasing current owners percentage of the company. Along with dividends, a decreasing share count is a way for management to return value to shareholders.
Current ratio measures a companies ability to meet short term obligations. Norfolk Southern has a 2012 FYE current ratio of 1.1. This means that current assets will be able to cover slightly more than current liability obligations. I generally want to see this number be above 1. I don’t believe Norfolk Southern should have any trouble covering short term obligations.
Net Profit to Long Term Debt
This number tells me how many years worth of profits it will take to pay off the current long term debt of the company. I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not.
Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt.
For Norfolk Southern, this net profit to long term debt ratio stands at about 4.8 for 2012. This means that Norfolk Southern would be able to pay off all their long term debt with a little under 5 years worth of net income. In my opinion Norfolk Southern does not have too much debt to worry about trouble in the near future. In fact, Value Line gives Norfolk Southern an A for financial strength indicating a fairly strong balance sheet.
Dividend Payout Ratio
The dividend payout ratio measures the dividend per share compared to the earnings per share. How much of a companies earnings per share are they paying out to shareholders in the form of a dividend.
The past few years NSC has maintained a dividend payout ratio around 35%. This tells me that Norfolk Southern is paying out around a third of their profits back to shareholders and using the remaining profits to continue to grow the company and buy back shares which they have had success doing over the past few years.
I like the lower payout ratio because it tells me that the company has room to expand the current dividend rate and should be able to pay dividends in the future with little trouble even if economic conditions turn negative. This has benefited NSC the past couple years as profits have declined a bit due to lack in coal freight revenue, yet the company has still managed to grow the dividend at an acceptable rate for shareholders.
The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason. With the most recent closing market price of $94.74 and most recent EPS of $5.37, NSC has a current P/E right around 17.6. Typically the market P/E average is right around 14 so compared to the market in whole I might determine Norfolk Southern to be overvalued.
Looking at NSC’s past P/E ratios, the average P/E ratio for Norfolk Southern’s stock over the past decade was 13.6. The current P/E of 17.6 is higher than the past average P/E ratios. This might lead me to believe that Norfolk Southern is slightly overvalued.
Norfolk Southern had EPS of $5.37 in 2012. The past earnings per share growth rate has been roughly around 16%. However, we calculated a much lower growth rate the past couple years. Therefore I am going to use an EPS growth rate of 7.5% over the next 12 years to figure out what 2024 EPS might look like. This gives me an estimated EPS of $12.79 for Norfolk in 2024.
If Norfolk Southern is trading at reasonable P/E ratio compared to their history of 14 in 2023 then it will have a market price of $179.06/share (12.79*14). This will give me an estimated annual growth rate for Norfolk Southern of 6.57% over the next 10 years. If you would be happy earning a 6.57% return over the next few years along with collecting annually increasing dividend payments, then Norfolk Southern might be an investment worth considering.
This is a very rough exercise based on growth estimates that may not come to reality. Actual returns in NSC will vary depending on how well the company increases their earnings and how the market values Norfolk Southern in the future.
I own Norfolk Southern in my dividend growth portfolio and plan on owning for the long term as I believe it to be a great company based on operating performance over the past decade.
However, I am not currently a buyer at the current price level. I believe the valuation is a little high and there are better opportunities available currently in other companies. However, I believe NSC to be a strong company and wouldn’t mind buying this railroad at current prices if I really wanted to own it and couldn’t find anything that much better to buy instead. I believe over the next decade, Norfolk Southern should turn out to be a solid investment that pays decent growing dividends for the owners of this company. I will be happy to continue owning NSC in my portfolio and will look to purchase more shares when the P/E ratio dips closer to 15.
Do you have an opinion on Norfolk Southern? Please share your thoughts in the comments below!
Disclosure: I am long Norfolk Southern.
If you are interested in learning more about the process of analyzing dividend growth companies, then be sure to sign up for more information on my new project Dividend Growth Academy. I am currently working on creating the Academy to help teach others interested in dividend growth investing.
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