CSX Corporation (CSX) has a been a mainstay stock in our Net Payout Yields model for over a year now. The company has a solid 2.5% dividend and has had a huge buyback plan that included over $1B worth of stock purchased in Q311 alone.
After the close on Tuesday, one of the leading railroad operators reported earnings of $0.49 that slightly beat estimates of $0.47. The number also was a 7 percent year-over-year improvement even though the actual earnings amount only increased from $506M to $512M. In essence, the whole gain per share came from the reduction of diluted shares outstanding from 1,109M in Q211 to 1,043M in Q212 or a 6% drop.
The disappointing disclosure in the earnings release was the lack of a buyback in Q212. The company has now failed to repurchase shares in 2 of the last 3 quarters. This places CSX on the list of potential sells in this model.
The net payout yield is the combination of dividend yield and net stock buyback yield with the latter being the amount of net stock bought over the last four quarters. In essence, the net payout yield is the percentage of the current market cap that a company has paid out to shareholders.
Lack Of Cash
In the case of CSX, the BOD decision on whether to buy shares probably was forced upon them due to lack of cash. At end of the quarter, the company only had $683M in cash versus $1,306M at the end of December. One main culprit for the reduction of cash was a $275M pension payment in addition to the reduction of debt by $155M during the first 6 months.
With over $8.5B in long term debt, it appears unlikely that CSX can spend the same on the buyback plan going forward. Considering CSX would have to spend $1B on buybacks in Q312 to match last year, the buyback yield is set to plunge further during this quarter.
The below chart highlights the reduction in spending on payouts to shareholders over the last five quarters.
Weak Utility Coal
The earnings results were in general better than expected led by shipments of export coal, intermodal and automotive products and offset by declines in utility coal.
Smaller competitor Kansas City Southern (KSU) reported similar sluggish revenue numbers due to weak utility coal shipments offset by higher automotive shipments that were up 18%. The company though was able to squeeze out a 20% increase in earnings with expenses held flat.
The railroad sector might being hitting a plateau unless utility coal shipments return. CSX has strong operations and a thought to be wide moat until the market realized that coal shipments could be replaced by a product shipped via pipelines.
At 11x next year earnings, the stock appears reasonably valued. The biggest concern remains the ability of the company to continue feeding shareholders with payouts. The lack of cash and high debt loads has the management team in a box. The stock is a potential sell for now.
Disclosure: I am long CSX.
Additional disclosure: Please consult your financial advisor before making any investment decisions.