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I continue to be skeptical of the recent market rally for reasons I have articulated recently. However, as the saying goes, one has to dance as long as the music is playing, and I have more than a prudent level of cash in my portfolio already. As funds get returned into my account as options expire in the money, one area I think still has value is the railroads. The housing recovery and buoyant domestic auto production bodes well for demand. In addition, the sector offers better valuations and growth prospects, as well as similar dividend yields to some of the overbid Consumer Staples names like Procter & Gamble (NYSE:PG). For income investors, I believe the sector offers better value than some of the defensive sectors (Utilities & Consumer Staples) that are usually the refuge of dividend investors. One railroad that looks like a good value here is Norfolk Southern (NYSE:NSC) due to some recent positives, reasonable valuation and solid and growing dividend yield

Recent positives for NSC:

  • Jefferies raised its price target Wednesday $4 a share to $90 a share and reiterated its "Buy" rating. Analyst Peter Nesvold sees "early signs of inventory restocking," which bodes well for transports.
  • Raymond James recently named it as one of the railroads that should benefit by the increasing amount of expanding domestic oil production being carried by rail. NSC benefits from the increasing traffic of oil going to east coast refiners.
  • The company should take increasing market share from truckers as new terminals open this year and fuel costs remain high (railroads can move 3-4 times more tonnage per gallon of fuel)
  • Consensus earnings estimates have stabilized and ticked up for both FY2013 and FY2014 over the last month.

Norfolk Southern operates 20,000 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada.

4 additional reasons NSC still offers solid value at $75 a share:

  1. The shares yield 2.7%. As importantly, Norfolk has increased its dividend payouts at just under 12% annually over the past five years.
  2. A value investor gets this yield for less than 14x forward earnings. Compare this to Procter & Gamble, which yields 2.9% but sells for 18x forward earnings. NSC has also increased its dividend 50% faster than PG over the last half decade.
  3. The company has met or beat earnings estimates for six straight quarters and the stock has a reasonable five year projected PEG (1.28) for an almost three percent yielder.
  4. S&P has a "Buy" rating on the stock and Credit Suisse is at "Outperform" on the shares. Both Deutsche Bank and Dahlman Rose upgraded the shares from "Hold" to "Buy" in the first quarter.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.