US Class I railroads
Now that we’ve discussed the FCF (free cash flow) levels of Norfolk Southern (NSC) and CSX (CSX), we’ll look at other Class I railroads. Notably, US Class I railroads’ better YoY (year-over-year) quarterly results have been due, in part, to share repurchases in 2017.
US-originated railroads’ stock buybacks
In 1H17, Union Pacific (UNP) repurchased common stock worth $1.6 billion, compared with $1.2 billion in 1H16. Its FCF was lower in 1H17 YoY. But if we add its cash dividends with share repurchases, UNP’s FCF isn’t enough to support the payments.
Kansas City Southern (KSU) started buybacks in 3Q15 and repurchased $120.0 million worth of common stock in 1H17—significantly higher than the $59.2 million it repurchased in 1H16.
In 1Q17, KSU had negative FCF, making its case similar to that of Union Pacific. KSU appears to lack the FCF support for both dividends and share repurchases.
Canadian Railroads’ share repurchases
Canadian National Railway (CNI) repurchased stock worth $1.0 billion Canadian dollars in 1H17, which was slightly lower than in 1H16. But CNI’s FCF has consistently risen over the past six quarters—something no other Class I railroad has achieved so far.
Although Canadian National’s FCF is lower than its cash distributions, the gap is much lower than it is for other railroads.
Canadian Pacific Railway (CP) bought back stock worth $142.0 million Canadian dollars in 1H17, compared with $788.0 million Canadian dollars in 1H16. But CP’s stock buyback in 1H16 far exceeded its $730.0 million of OCF (operating cash flow) during the same period. Notably, CP’s FCF rose in 1H17, supporting its cash distributions.
Almost all the North American Class I railroads (XTN) have thus indulged in stock buyback activity by raising debt—except for Canadian National Railway.
But why should investors be attentive to these railroads’ stock buybacks? Continue to the next part for further discussion.