uploads///CP Forward DivYield

CP’s Dividend Remains a Story of Uneven Growth, Low Yields

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Mar. 8 2018, Updated 3:45 p.m. ET

CP’s dividend payout

Canadian Pacific Railway (CP) declared a quarterly cash dividend of 0.56 Canadian dollars per share on February 15, 2018. If we annualize this quarterly dividend, it amounts to a per-share yearly dividend of 2.25 Canadian dollars for 2018. CP’s dividend payout was 13.7% based on its last four quarters’ earnings of 16.4 Canadian dollars per share.

CP’s dividend payout ratio of 48% in 2012 was its highest in the last ten years. Its lowest ratio was 15% in 4Q17. Currently, Canadian Pacific Railway’s dividend payout ratio is near its lowest point in the last ten years.

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Railroad companies’ dividend yields

The railroad is a highly capital-intensive industry, and business reinvestment levels are considerably high. As a result, the scope for dividend payments is limited. Note, however, that these railroads distribute cash to stock owners through stock buybacks—a preferred route nowadays.

The above chart reflects that among all the Class I railroad companies (XLI) in the United States, Canadian Pacific Railway has the lowest forward dividend yield of 1.1%. This low yield is reflected in the company’s dividend payout ratio, which is on the much lower side compared to its peers.

This difference means that the company’s retention ratio is much higher, which can be seen in its capex (capital expenditure) levels in recent quarters. A higher retention ratio has led to a spike in its stock price, which has resulted in a lower yield for Canadian Pacific Railway. The company’s prime competitor, Canadian National Railway (CNI), has a forward dividend yield of 1.9%.

Major western US railroad company Union Pacific (UNP) has the highest forward dividend yield of 2.12% among the US Class I railroad companies. It’s immediately followed by Norfolk Southern (NSC) with a yield of 2.07%. For NSC’s prime competitor, CSX (CSX), the same metric stands at 1.6%. United States’ smallest Class I railroad company, Kansas City Southern (KSU), has a yield of 1.3%. US major railroad companies’ stocks’ forward dividend yields have fallen recently due to a surge in their stock prices.

CP’s uneven dividend growth

A quick look at the first article’s chart suggests that Canadian Pacific Railway’s dividend growth has been very uneven. In 2016, CP’s dividend jumped 43% on a year-over-year basis. However, in the last 15 years, the company’s dividend has never fallen on a yearly basis.

Note that the company’s dividend has risen 7.1% per annum over the last five years—half the 18.2% per annum growth posted by competitor Canadian National Railway.

In the next article, we’ll assess Canadian Pacific Railway’s free cash flow levels.

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