Monday, August 5, 2013

Stock Analysis: NSC

Based in Norfolk, Virginia, Norfolk Southern Corporation (NSC) is a leading North American transportation provider. Its Norfolk Southern Railway Company is primarily engaged in the rail transportation of coal, automotive, and industrial products. 

NSC has a track record of 12 consecutive years of dividend increases. It pays quarterly dividends of $0.52 per share in the months of March, June, September, and December. At the current price of $75.50, NSC yields 2.75%.

Over the past 10 years, NSC has outperformed the S&P 500 handily, returning 394% compared with 74% for the S&P 500. NSC's dividend growth rate over this period was 22%. 

Fair value estimates for NSC vary from $63.83 (Graham Number method) to $81.30 (S&P Capital IQ) to $83.0(MorningStar). The current price is discounted by 7.68% to the median of these estimates ($81.30). 

NSC passes the following of my selection criteria:
  • Sum of dividend yield (2.75%) and 5-yr dividend CAGR (15.11%) is 17.86% (Chowder Dividend Rule)
  • EPS% Payout ratio is 38.38% (below 65%)
  • 7-year weighted average dividend growth rate is 17.69% (at least 7%)
  • Forward P/E ratio is 12.01 and the trailing twelve month (TTM) P/E ratio is 13.93 (below 16%)
NSC fails the following of my selection criteria:
  • 5-yr total payback percentage is 15.84% (below 16%, though barely)
  • Debt to Equity ratio is 0.83 (above 0.5)

NSC earns 6 stars: (*******)

Other ratings for NSC

S&P Capital IQ Stock Report (*****)Buy
Thomson Reuters StockReport+ (5/10)Neutral 
MorningStar Rating (*****)
The Motley Fool CAPS Rating (*****)
Zacks Rank/Recommendation  3-Hold/Neutral 

Concluding Remarks

NSC pays a reasonable dividend and has a solid dividend growth history. If I were to purchase 33 shares of NSC, DivGro's exposure in the Services sector would be increased and my annual dividend income would increase by $68.43.

NSC has performed consistently for several years. Strong free cash flow has allowed the company to increase returns to shareholders in the form of dividend payments and share repurchases. NSC has plans to reduce debt. The company will likely benefit from favorable pricing adjustments and growing market demand in certain segments.

Near-term growth prospects for NSC will be tempered by weaker demand for coal and crops, while regulatory issues, volatile fuel prices, and labor problems could create additional roadblocks.

Given uncertainties in NSC's growth prospects, I'm not convinced that NSC will be able to reduce its debt quickly. In fact, recently a significant portion of free cash flow has gone into maintaining (and increasing) dividend payments. I'll wait for a more positive outlook in NSC's growth prospects before I consider buying shares for DivGro.

Full Disclosure: I don't own any shares in NSC and I'm not planning on buying any shares soon.


  1. Thanks for the write-up. I just recently trimmed shares after the paltry 4% raise. That will drop the CAGR a little. I still like the company long-term and would add more on additional weakness.

    1. Thanks for your note -- I agree NSC is a good long-term prospect. My hesitation is more about what to do right now. While I want to diversify into different sectors, I do want to buy fairly valued stocks with good dividend yields and growth prospects. One data point about NSC that bothers me is its very high free cash flow payout ratio, which could jeopardize future dividend increases if earnings growth is tempered.


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