There's no better time to catch the trains. Train stocks, that is.
The nation's railroads are generating strong profits, according to their recent quarterly reports. In turn, they are rewarding shareholders with reliable growth and solid dividends.
This article will discuss three top railroad stocks today:
Canadian Pacific Railway Keeps Running
Canadian Pacific (CP) is one of two class 1 railroad companies in Canada, which provides a tremendous moat. With high barriers to entry, it's unlikely that new market entrants would try to steal market share.
CP's 2022 merchandise revenue diversification is as follows: 45% in energy, chemicals, & plastics, 28% in metals, minerals & consumer products, 14% in automotive, and 13% in forest products.
Canadian Pacific Railway has combined with Kansas City Southern to create Canadian Pacific Kansas City ("CPKC"), the first single line railway that connects Canada, the United States, and Mexico. It is the only railway connecting North America and has unrivaled port access on coasts around the continent, from Vancouver to Atlantic Canada to the Gulf of Mexico to Lázaro Cárdenas on Mexico's Pacific coast.
The acquisition should significantly boost the company's top-line growth as well as provide opportunities for cost synergies to expand margins. Soon after announcing the successful acquisition of Kansas City, CPKC also announced multi-year agreements with Schneider and Knight-Swift, respectively, for intermodal transportation service and truckload intermodal transportation service that connects the U.S. and Mexico.
CPKC reported first-quarter earnings results in late April, showing that for the quarter revenues vs. the same period last year rose 23% to $2.27 billion, operating income increased by 55% to $829 million, while core adjusted diluted earnings per share climbed 34% to $0.94. (All figures are in Canadian dollars.) In the first quarter, CP's operating ratio (OR, i.e., operating expense relative to revenues) improved by 7.5% to 63.4%. Its adjusted OR also improved -- by 6.9% to 62.9%.
Canadian Pacific's dividend payout ratio is low. Its dividend is safe and management plans to expand the payout ratio to 25%-30% of adjusted EPS over time. CP stock yields just under 1% but it has a significantly higher shareholder yield due to its share repurchase activity.
CSX Corporation: A Long History Sets Tracks for Growth
CSX (CSX) can trace its roots all the way back to 1827 when the B&O Railroad was first chartered. From just 13 miles of track, CSX has grown to cover 23 states and more than 20,000 route miles. CSX provides rail, rail-to-truck, and intermodal transport services. The company should produce about $14.8 billion in revenue in 2023.
CSX reported first quarter earnings on April 20, revealing better-than-expected revenue and profits. EPS came to 48 cents, which was a nickel better than expected. Revenue was up almost 9% from the comparable period last year to $3.71 billion, and beat estimates by $130 million. That result was driven by strong volume growth in merchandise and coal, as well as higher fuel surcharges and pricing gains. Operating income rose 14% to $1.46 billion, with an operating ratio of 60.5%. That was 200 basis points better than expectations, and boosted margins.
Management guided for inflationary pressures on costs for this year. However, it is also focused on efficiency to counteract some of that, and first-quarter results show that it is able to raise prices on customers to preserve margins.
CSX stands to gain in the form of modest revenue increases in the coming years, helping to fuel our estimate of 6% earnings-per-share growth annually. The remainder will come from improved operating efficiency leading to higher margins, as well as sizable buybacks. We see the share count declining in the mid-single digits annually as CSX generates strong free cash flow and puts it to use through buybacks and dividends.
CSX has put buybacks first in recent years but with a much-reduced capex budget as part of its operational efficiency initiatives, more cash should be freed up for dividend increases. With the payout ratio still very low, CSX has plenty of room to continue its streak of dividend increases while still affording it the ability to buy back stock. Shares yield 1.4%.
Union Pacific: The Big Game
Union Pacific (UNP) is the largest railroad company in the country and operates more than 32,000 miles of rail throughout the western two-thirds of the country. Union Pacific transports industrial and agricultural products, as well as coal and chemicals. The company generates about $25 billion in annual revenues.
Union Pacific released earnings results for the first quarter in late April, showing revenue increased 3.4% to $6.06 billion and was $30 million better than expected. Unadjusted EPS of $2.67 compared to $2.57 in the prior year. Union Pacific's operating ratio of 62.1% was 270 basis points higher than the prior year.
Revenue for bulk products grew 4% as a 7% increase in average revenue per car more than offset a 3% decline in volume. Coal and grain shipments leveled off from prior periods. Revenue for the Industrial category was up 5% due to higher revenue per car. Volume was flat once again. Metals and minerals were again higher due to construction growth.
Earnings-per-share have increased at a rate of more than 10% per year over the past decade. We believe that an earnings-per-share growth rate of 7% takes into account the quality of the firm and strong results over the past few years while reconciling that earnings-per-share are starting from a high base.
Union Pacific has increased its dividend for each of the past 15 years. With a projected dividend payout ratio of 45% for 2023, the dividend is highly secure. The stock has a 2.7% dividend yield.
