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, DivHut (226 clicks)
Long only, long-term horizon, dividend investing, dividend growth investing
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Investing In Railroad Dividend Stocks

A couple days ago I wrote an article highlighting the railcar industry and several dividend stocks worth considering in that sector. Many of the railcar stocks are experiencing back orders for their railcars as railroad lines look to upgrade and expand their aging fleets. The railcar dividend stocks such as Trinity Industries Inc. (NYSE:TRN) and American Railcar Industries, Inc. (NASDAQ:ARII) are especially interesting as they are experiencing great demand for their oil and gas railcars to meet the demand of the ever-growing fracking boom being experienced in North America. It seems that rail is the transport mode of choice for this commodity. Today, I’ll be discussing the various dividend-paying railroad companies and providing an overview of each one.

First up is one of the largest railroad companies around by market cap, Union Pacific Corporation (NYSE:UNP). This stock currently pays a dividend yield of 2.00% with a moderately low payout ratio of 36.2% based on its current EPS of $5.53. Growing its dividend for the last four years, UNP also has a very impressive ten-year annualized dividend growth rate of 19.58%. On the valuation side of things, UNP is slightly expensive relative to the S&P but in line with industry peers at 21.60. Forward P/E looks much better at 16.65, suggesting share price has run a little ahead of earnings as of late.

Next is the Canadian railroad stalwart Canadian National Railway Company (NYSE:CNI). Currently yielding 1.40% with a moderately low payout ratio of 29.9% based on an EPS $3.34, CNI also has a very impressive ten-year annualized dividend growth rate of 17.32%. From a P/E standpoint, CNI appears to be a little pricey at current levels at 24.06, but like UNP, the forward P/E for this one is a much more attractive 17.03. Though very popular among the dividend blogging community, you might want to wait before you pull the trigger on this one.

Another popular railroad dividend stock among the dividend bloggers is Norfolk Southern Corporation (NYSE:NSC). NSC currently yields 2.20% with a moderately low payout ratio of 35.4% based on an EPS of $6.44. Having raised its dividend for the last four years like UNP, NSC also has an awesome ten-year annualized dividend growth rate of 21.13%. I think I’m starting to notice a trend here about these impressive dividend growth rates with the railroad stocks. On the valuation side of things, NSC looks to be on the cheaper side relative to industry peers at 18.17 with a forward P/E of 14.36. Have share prices been lagging on this one, and is NSC a better value relative to other railroad stocks?

Going down the line of decreasing market cap is also dividend blogger favorite CSX Corp. (NYSE:CSX). Having a relatively attractive yield like NSC of 2.20% with a moderately low payout ratio of 34.4% based on an EPS $1.86, CSX has plenty of room to continue dividend payments with future increases in sight. The ten-year annualized dividend growth rate for CSX is an amazing 24.36%. Like NSC, the valuation of CSX looks a lot more attractive than its peers with a P/E 17.39 and a forward P/E of 14.54. It seems that from a strict P/E perspective the best values, yield and dividend growth can be found with CSX and NSC. Of course, a four-star rating for CSX from Morningstar doesn’t hurt either.

Finally, the smallest of the railroads featured today is Kansas City Southern (NYSE:KSU). KSU currently yields a low 1.00% with a low payout ratio of 23.8% based on an EPS of $4.71. Having resumed its regular dividend payment in 2012 after a long halt going back to 1999, KSU on a P/E basis is the most expensive of the bunch with a P/E of 36.72. Forward P/E looks slightly better at 20.74, but still more expensive than its peers, suggesting share price has run way ahead of earnings on this one.

Clearly, the railroad sector has a lot going for itself. Increased demand for their transport services in a growing economy coupled with a new oil and gas boom has made these companies very profitable in recent years. Each company featured pays a dividend with low payout ratios that leaves more than enough room for future payments and dividend growth. With the exception of KSU that halted its dividend in 1999 only to resume in 2012, each of the other railroad companies have experienced a tremendous annualized dividend growth rate going back at least ten years. It’s no secret the railroad sector is booming for the above reasons mentioned and that in 2009 Warren Buffett’s Berkshire Hathaway purchased wholly-owned BNSF, the second largest railroad behind UNP.

Addendum: Not to offend our Canadian friends up north, I wanted to also mention briefly Canadian Pacific Railway Limited (NYSE:CP). Offering a very low yield of 0.70% with a very low payout ratio of 15.1% based on an EPS of $7.97, CP has a ten-year annualized dividend growth rate of 13.33%. This stock definitely has room for future dividend increases. Expensive on the valuation side of things with a P/E of 42.39, forward P/E looks much more attractive at 18.68. You might want to wait on this one a bit.

What do you think about the railroad sector? Are any of the companies mentioned on your watch list or in your portfolio? Please let me know below.

Disclosure: Long NONE