Norfolk Southern Corp. operates 20,000 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada.
In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page 2 of the above-linked PDF for a detailed description):
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
NSC is trading at a discount to only No. 3 above. The stock is trading at a 13.2% discount to its calculated fair value of $73.29. NSC earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data
In this section, there are three possible Stars and three key metrics (see page 2 of the above-linked PDF for a detailed description):
Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling Four-year Div. > 15%
NSC earned two Stars in this section for Nos. 2 and 3 above. The stock earned a Star as a result of its most recent debt to total capital being less than 45%. NSC earned a Star for having an acceptable score in at least two of the four key metrics measured. Rolling four-year Div. > 15% means that dividends grew on average in excess of 15% for each consecutive four-year period over the last 10 years (2002-05, 2003-06, 2004-07, etc.). I consider this a key metric since dividends will double every five years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1901, and has increased its dividend payments for 11 consecutive years.
Dividend Income Vs. MMA
Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section (see page 2 of the above-linked PDF for a detailed description):
- NPV MMA Diff.
- Years to > MMA
NSC earned a Star in this section for its NPV MMA Diff. of the $9,424. This amount is in excess of the $2,400 target I look for in a stock that has increased dividends as long as NSC has. The stock's current yield of 3.05% exceeds the 2.6% estimated 20-year average MMA rate.
Memberships and Peers
NSC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes CSX Corp. (NYSE:CSX) with a 1.7% yield, Canadian National Railway Company (NYSE:CNI) with a 1.9% yield, and Union Pacific Corporation (NYSE:UNP) with a 2.0% yield.
NSC earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section, and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks NSC as a Four-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $110.13 before NSC's NPV MMA Differential decreased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price, the stock would yield 1.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 10.1%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. NSC has a risk rating of 2.00, which classifies it as a medium-risk stock.
As a cyclical stock, NSC is exposed to the ups and downs of economic cycles. In addition, the company has to deal with regulations, labor unions, and significant capital requirements. However, NSC is one of the best-run railroads in North America, generating one of the top operating ratios in the industry. Management continues to invest in its network by improving capacity on heavily trafficked routes. As the economy recovers and truck capacity diminishes, NSC is well-positioned to to pick up the excess demand.
Recently, UBS downgraded Norfolk Southern from Buy to Neutral, within a week the shares slipped 12% to $65. Since then the shares have continued to drift downward. With only moderate debt and strong free cash flows (six of the last seven years FCF was over $1 billion), the company should continue to grow its dividend for many years to come. I will will continue to view the market weakness as an opportunity to add to my position when the stock is trading below my calculated fair value of $73.29, and as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my disclaimer for more information.