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How Has the New Tax Code Enabled CSX to Pay Higher Dividends?

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CSX’s dividends

CSX’s (CSX) transportation network is spread over ~21,000 route miles of track in 23 states, the District of Columbia, and the Canadian provinces of Quebec and Ontario. On February 12, 2018, CSX announced a 10.0% increase in its quarterly cash dividends. 

On the same day, the railroad (IYJ) also declared an increase in its present stock buyback program to $5.0 billion. This share repurchase is expected to conclude by the end of 1Q19.

After the 10.0% dividend increase, CSX’s quarterly cash dividend rose to $0.22 from $0.20. In 2017, the company returned $2.7 billion to stock owners in the form of $2.0 billion in stock buybacks and $700.0 million in dividends. This was 33.0% higher than the cash distribution levels in 2016.

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CSX’s dividend stats

In 2017, CSX’s dividend payout ratio was ~35.0% based on its yearly earnings per share of $2.30. Considering the company’s past dividend growth (VIG), CSX’s dividend grew in double digits in 2015. 

Compared with competitor Norfolk Southern’s (NSC) dividend growth, the company’s dividend rise seems to be uneven. In 2011 and 2012, CSX’s dividend per share declined in double digits.

CSX’s free cash flows

Free cash flow (or FCF) levels mainly depend on the magnitude of operating cash flows and capital expenditures. From an FCF perspective, CSX lagged behind Norfolk Southern. Notably, CSX’s cash flows from operations had declined in the five years ended 2016. However, the operating cash flows jumped from $3.0 billion in 2016 to $3.4 billion in 2017.

With the impact of the Tax Cuts and Jobs Act, CSX’s free cash flows jumped from $643.0 million in 2016 to $1.4 billion in 2017. For 2018, the company’s FCF is expected to grow 67.3%, touching $2.6 billion. Considering the increased dividend payment, the railroad’s (GWR) free cash flows would be more than enough to support the increased dividend payments.

Because the company has already increased its stock buybacks, the chances of raising further dividends in 2018 are dim. This could happen only if the company’s operating cash flows rise substantially this year.

Keep reading for an update on Union Pacific’s (UNP) dividends in 2018.

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