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How NAFTA Worries Affect Kansas City Southern’s Dividend Plans

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KSU’s cash dividend

Kansas City Southern (KSU) has operations in the US, Mexico, and Panama. On January 24, 2018, KSU declared a regular quarterly cash dividend of $0.36 per share. In 3Q17, it declared an 8.3% increase in its quarterly dividend from $0.33 per share to $0.36 per share. 

Unlike other Class I railroads (XLI), KSU hasn’t announced any equity dividend increases after the implementation of the Tax Cuts and Jobs Act.

Regular dividend payments for Kansas City Southern started in 2012. The chart above shows that the railroad’s yearly cash dividends have remained the same in the last two years. KSU’s financials disclose that a credit agreement in 2006 restricted the company from paying equity cash dividends.

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NAFTA and KSU

President Trump has threatened to renegotiate NAFTA, and Kansas City Southern derives roughly ~50.0% of its revenues from Mexican operations. There have been seven rounds of negotiations on the NAFTA issue so far. The NAFTA worries could adversely impact KSU’s cross-border revenues. 

Railroad (BRK.B) lobbyists, including the heads of Union Pacific (UNP) and Kansas City Southern, have expressed their concerns over the NAFTA renegotiations. The Association of American Railroads (or AAR) has sought a meaningful outcome from NAFTA renegotiations.

The AAR issued a letter to the US government stating, “Economic growth tied to NAFTA has allowed railways to invest tens of billions of dollars into their infrastructure while improving productivity and customer service, and fostering innovation…. Collectively, these improvements have enabled railways to maintain the low rates that are required to provide shippers with access to global supply chains and support their success.”

KSU’s free cash flows

Kansas City Southern’s capital expenditures in 2018 are expected to fall to $551.1 million from $628.0 million in 2017. Its operating cash flows are anticipated to touch ~$1.1 billion this year from ~$1.0 billion in 2017, which could result in higher free cash flows. 

Analysts estimate that KSU’s free cash flows could reach ~$500.0 million in 2018 from $400.0 million in 2017. Considering the low levels of KSU’s stock repurchase activity, investors should expect the company to increase its dividends in 2018.

In the final part of this series, we’ll discuss Canadian National Railway’s (CNI) dividends.

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