Is CSX Corporation A Good Dividend Pick?

Apr. 3.14 | About: CSX Corporation (CSX)

Summary

Average annual growth of about 21% in dividends over the last five years.

Payout ratio based on free cash flows of about 63% gives it further room to grow dividends.

The revenue mix is getting better and the losses from the coal segment will be offset by the diversification.

The demand for coal and is usually high during the winters, which is a beneficial development for the railroad companies as coal transportation is a major business for some of these companies. CSX Corporation (NASDAQ:CSX) is one of the leading freight transport companies that stand to benefit from the increased demand for coal. The company provides rail, intermodal and rail-to-truck trans-load services to industries such as energy, chemicals and agriculture. However, the company has lost significant portion of its coal business over the last year, but it has built its intermodal business to compensate for the losses and this segment has attractive growth opportunities. However, the focus of this article is the dividend growth, company's ability to grow dividends and the future prospects of the company.

Dividend Growth

CSX has been growing its dividends consistently over the last decade. Since the second stock split in 2011 (CSX has had two stock splits: the first was 2-for1 in 2006 and the second was 3-for-1 in 2011), the company has increased its quarterly dividend twice. The company usually increases the dividend in the second quarter of the year - we have seen four quarters of $0.15 per share dividend, and we will likely see a dividend increase in the next quarter. Currently, the company pays an annual dividend of $0.60 per share, yielding 2.1%. During the last year, the company distributed cash dividends of $600 million. Furthermore, the company has performed treasury stock operations of $353 million, which takes the total cash returned to shareholders to $0.95 billion.

The payout ratio based on free cash flows is around 63% for CSX ($600 million cash dividends and $954 million in free cash flows for the same period). However, the payout ratio based on earnings stood at 32% for CSX with an EPS of $1.83. CSX also has a decent average dividend growth over the past five years compared to its competitors such as Norfolk Southern Corporation (NYSE:NSC) and Union Pacific Corporation (NYSE:UNP).

Dividends per share

Average growth in Five years

Dividends Paid (Billions)

Free cash flows (Billions)

Payout Ratio

CSX

$0.60

21%

$0.6

$0.954

63%

Norfolk Southern

$2.16

12.5%

$0.64

$1.11

58%

Union Pacific

$3.64

29%

$1.33

$3.33

40%

Click to enlarge

Source: Morningstar

Note: For the calculation of the average annual growth rate; we have ignored 3-for-1 stock split in 2011.

Railroad companies require huge capital spending in order to maintain the widespread business activities. However, the company has reduced its capital expenditures by 1.2% over the last year and plans to keep the capital investments for the current year at a level of $2.3 billion. Over half of this investment will be used to sustain the core infrastructure, ensuring strong revenue generation from the operational activities in the coming years.

Future Prospects

The US economy depends heavily on the rail road business as it transports almost everything from crude oil to chemicals and from agricultural products to consumer products. The essential characteristic of this mode of transportation is cost efficiency compared to the other modes of transportation. The business has large barriers to entry which keeps the competition in check and the market does not get overcrowded.

The company has increased its footprints in the merchandise and intermodal shipment business segment with the completion of Phase One of National Gateway public-private partnership during the last year. The segment rose to 82% eventually offsetting coal revenue declines of nearly $300 million over the same period.

The key growth drivers for the coming years include the uncertain construction of Keystone XL pipeline which will divert the transportation portal of crude oil towards railroad companies. According to financials, the company carried around 50,000 carloads of oil which will be expected to increase by approximately 50% during the current year. Therefore, the transportation of oil to Canadian region will be carried out from railroad companies that will enhance the revenues of the company.

The coal transportation segment of the company suffered a serious setback with losses accumulated up to $800 million over the last two years. Therefore, the company has shifted its focus mainly towards intermodal segment, which increased its revenue by 10% in the last year. Furthermore, the company also doubled its capacity at Louisville terminals and expanded operations in Columbus. The company is also planning on opening terminals in Florida and Canada to serve the increasing demand.

Conclusion

The railroad companies are usually conservative investments with steady growth and healthy income component. CSX has suffered due to the falling demand for coal, which was one of its major segments. However, the diversification in the business will make up for the losses going forward. Barriers of entry are massive in this sector due to the huge capital requirements along with the tight regulatory requirements. The stock has gained about 21% over the last twelve months, clearly indicating that the company is getting out of the coal slump and the future prospects are bright. Our analysis also indicates that the company will be able to maintain its current dividends, and the cash flows are strong enough to support the future growth in dividends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.