Norfolk Southern's Dividend Will Continue To Rise
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Norfolk Southern (NYSE: NSC) operates one of the largest rail networks in North America and the most extensive intermodal service in the Eastern United States. It operates over 20,000 route miles of rail and provides major connections to other rail carriers across the Midwest. Norfolk Southern currently has operations in 22 states and in Washington, DC and mostly transports coal and other industrial products throughout the East and Midwest. Its dividend has risen twice in the last four quarters and I believe that it will continue to rise in coming quarters, making it a reliable and safe bet for income investors.
Norfolk Southern is based out of Norfolk, VA, and serves every single major port on the East coast. Its network expands as far west as Chicago, IL and it is currently undergoing a $9.5 billion project that is being paid for by its customers to expand 27 industries along its rails and to add an additional 73, with the project showing the potential to add an additional 152,000 carloads of traffic each year. Energy companies have contributed greatly to the expansion as coal production increased and Marcellus Shale gas exploration has ramped up in previous years. This trend is expected to continue as energy companies continue to look into shale projects in the future and is becoming a stable component of Norfolk Southern’s business.
Over the last decade, Norfolk Southern has assisted in the location or expansion of over 1,000 facilities and the total investment poured into the projects from its customers over this time has amounted to over $30 billion. The expansion of these industries is responsible for the creation of over 46,000 jobs over the last ten years, 6,800 of which have been added over the last twelve months. Norfolk Southern is closely connected to the energy sector and while 41% of its additional traffic is due to increased coal production, it is also serving the needs of energy companies involved in shale gas exploration more each year.
Norfolk Southern recently announced this January that it has completed a project to upgrade its route from Columbus to Cincinnati and to Detroit, allowing double stack freight to travel to both locations from Virginia without the need to take less direct routes that were adding an addition one to two days of travel time due to the inability to transport double stacked freight through Ohio. The project involved raising the clearance at five different locations between Columbus and Cincinnati and adding track at its terminal near Columbus. Improvements to the railway between Columbus and Cincinnati have shortened the travel distance between Port Virginia and Detroit by 212 miles and shortened the trip from Port Virginia to Cincinnati by 69 miles.
Norfolk Southern grew the most among its closest competitors over the last twelve months, posting revenue growth of 16.9%. Union Pacific (NYSE: UNP) grew 15.8% and CSX (NYSE: CSX) only showed revenue growth of 4.8%, giving Norfolk Southern the edge in 2011. Union Pacific and CSX operate in different markets and transport different types of freight than Norfolk Southern, making them of little threat to each other in the rail industry.
Union Pacific operates in the western two thirds of the United States and delivers grain, food products, chemicals, automobiles, minerals and lumber. CSX delivers similar cargo along its 21,000 mile network and is physically closer to Norfolk Southern than Union Pacific is, with routes in the east and Midwestern United States along with rail extending into the south. I believe that Norfolk Southern is able to operate with minimal interference from competitors and will continue to grow as energy production ramps up.
Over the last three years, Norfolk Southern stock has more than doubled from $27 per share to $65 and it has announced raises to its dividend twice in the last year. In August of 2011, it announced a payout of $0.43 per share, up from $0.40 per share the previous quarter and in the first quarter of 2012; it announced a dividend of $0.47 per share after paying $0.43 for two consecutive quarters. As Norfolk Southern continues to realize more profit and helps connect more customers to its rail network, I believe that it will only continue to grow and its dividend will be increased accordingly.
In 2009, Norfolk Southern had net revenue of just over $1 billion and it has almost doubled its yearly revenue two years later. In 2010, it reported net revenue of $1.5 billion followed by $1.9 billion in 2011, showing a consistent and steady trend of growth that has supported its dividend increases. It currently pays out at a ratio of 0.34 and in my opinion; we can expect higher dividends in the future to add to its yield of just under 3%.
I believe that Norfolk Southern is a great short and long term position and its rising dividend will become valuable in the future for income investors who enjoy the opportunity to strengthen their position through dividend reinvestment. In my opinion, Norfolk Southern is quickly proving to be more valuable than $65 per share and the opportunity exists to see strong gains when the market adjusts accordingly and Norfolk Southern trades closer to $75 per share or beyond.
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