All Aboard The Dividend Train, Part 1

Includes: ARII, GBX, RAIL, TRN
by: Divhut

Investing In Railcar Dividend Stocks

The railroad and railcar industry has a long rich history in North America. Though often thought of as a legacy industry, they are still very important to the modern economy. In fact, the rail network and the trains that operate on that network are more efficient and cost effective than truck transport.

The rail industry also provides a general overview of economic health as carload traffic is directly proportional to economic activity. Of course, as dividend investors we are not only interested in the economic prosperity of specific rail industry companies, we also demand a healthy and sustainable dividend. That being said, I’d like to highlight specific railroad and railcar dividend stocks in two parts. This article will focus exclusively on the railcar sector, while the next blog post will focus on the railroad sector.

First up in the railcar sector is Trinity Industries Inc. (NYSE:TRN). TRN builds a variety of railcars including boxcars, auto carriers, tank cars as well as various railcar parts and components. TRN also manages railcar fleets on behalf of third parties and owns or leases over 75,000 railcars. This is a stock with a low yield of 0.90% and an equally low payout ratio of 9.8%. It’s quite rare to find a payout ratio that is in the single digits, which makes the dividend of TRN quite safe and with room to grow based on current cash flow. I know the current yield of TRN is nothing to get excited about, especially if you are looking for some current cash flow from your dividends, but the ten-year annualized dividend growth rate stands at 12.07%. That kind of dividend growth will definitely keep pace with inflation rates. On the valuation side, TRN has a low current P/E of 7.29, making it quite cheap relative to the S&P and industry peers.

Our next railcar dividend stock is The Greenbrier Companies, Inc. (NYSE:GBX). Like TRN, GBX designs, manufactures, and markets freight cars, tank cars, solid waste cars, coal cars and more. The company also has a railcar maintenance segment that refurbishes and reconditions wheels, axles and older railcars. Currently yielding a low 0.90%, GBX recently reinstated its dividend this year after suspending it in 2009 because of the weakened economy. Prior to its dividend suspension, GBX had relatively low payout ratios under 25%, however, the need to conserve cash in 2009 preempted any other need of the company. Forward P/E for GBX is 17.43. This one is a definite wait and see in terms of profitability and as future dividend payments are concerned.

Next up is small cap FreightCar America Inc. (NASDAQ:RAIL). As the name suggests, FreightCar America Inc. designs, manufactures, and sells aluminum-bodied and steel-bodied railcars and coil steel cars in North America, Latin America, and the Middle East. RAIL currently yields 1.10% with a relatively low payout ratio of 35.8%. The forward P/E for RAIL is 15.48. In general, I do not like to invest in small cap stocks ($328.83M), but I wanted to give a more complete overview of the dividend paying railcar manufacturers.

Our last dividend paying railcar stock is American Railcar Industries, Inc. (NASDAQ:ARII). ARII designs and manufactures hopper and tank railcars and provides various railcar servicing solutions. ARII, like TRN, also operates a leasing division for its railcars and is currently yielding a relative healthy (compared to the other railcar dividend stocks) 2.30% with a moderately low payout ratio of 35.1%. On a valuation note, ARII has a current P/E of 18.94, but a more attractive forward P/E of 16.58, putting it below the S&P and industry peers alike. One figure that may interest you is the extremely high five-year annualized dividend growth rate of ARII, which is 52.81%. I’m sure this hyper-dividend growth cannot continue for a longer period of time, but clearly this stock has room to continue boosting its dividend for the near term.

Clearly, in the railcar sector there are a variety of choices when it comes to finding a stock that hits the dividend sweet spot. You have a low-yield, high-dividend growth choice with TRN, along with a higher-yielding and very high-growth dividend stock such as ARII and others that fall out of the dividend sweet spot spectrum. Have you ever thought about investing in railcar manufacturers? Let me know below. Next up, we’ll discuss the various dividend-paying railroad stocks.

Disclosure: Long NONE