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I have followed Norfolk Southern since it was Norfolk and Western back in the late 1940s. We lived close to the railroad track and the old steam engines would shake the ground as they came by hauling coal. I saw tank cars on some trains, but never thought that a railroad could compete with a pipeline for bulk transfer of that commodity. When I worked for Dominion Resources, we converted some power stations from coal to oil with barges to supply the oil, while coal came in by train. Today, with the shale oil boom and the lack of infrastructure in pipelines, railroad transportation of oil is a current fact. The situation is similar to World War II during which the railroads ran day and night to transport oil, while the big inch pipeline was being constructed.

Railroads are a cyclical industry, especially Norfolk Southern (NYSE:NSC) which traditionally was a coal hauler. Intermodal transportation smooths out the cyclicality somewhat, but the result is still cyclical.

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In the following analysis data is taken from David Fish's CCC charts and Yahoo Finance.

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Norfolk Southern Corporation, through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. Tom Armistead wrote a good analysis of the company "Why I Like Norfolk Southern For the Long Term" which details current metrics and issues.

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Norfolk Southern is a Dividend Contender with 11 years of increasing dividends, a current yield of 3.23%, and a 5-yr dividend growth rate of 15.1%. The current P/E ratio is 11.24. The projected 5 year earnings per share growth rate is 12.7% and this year's earnings per share growth rate is 6.3%. I believe the stock is fairly valued at $73. However, I prefer a margin of safety and a 4% yield on a dividend growth stock. Therefore, I created a 5-yr dividend reinvestment table for this prospective holding:

StockDate of reinvestDiv Rate# SharesDividendDrip price# Shares purTotal ValueCurrent Yield
Totals  218.54$1,556.65 26.57  

The price cyclicality can be seen from this table. In addition, it also shows that the growing dividend purchased more shares during the downturn of 2008-2009 than were purchased at other times providing a form of dollar cost averaging. The $10,000 originally invested provided $13,407.29 after 5 years of quarterly reinvestment or 6% per year. These results are graphed below:

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Conclusion: During the current business cycle, NSC appears to be heading down and a good buying point at 4% yield is possible. However, it can be seen by the chart that the stock has not reached 4% yield in the last 5 years. By setting a limit buy order anticipating the next dividend increase of 15.1%, I may be able to pick up this long-term holding at a 4% yield. The purchase price will be $57.55. In the long run, NSC should benefit from the global economy pickup, especially exports of oil, coal, and manufactures.

It is critical that one does their own due diligence on any investment.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NSC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.