As railroads are capital-intensive, they have historically low levels of dividend yields in the industrials space. Over the last three years, the forward dividend yield of US Class I railroads (XLI) has risen due to a fall or rangebound stock prices.
Railroads’ forward dividends
The forward dividend yield is derived by dividing yearly expected future dividend payments by the present stock price. The forward dividend yield is also expressed as dividend per share relative to the stock’s market price. A quick look at the financials of Class I railroads in the US reveals that their dividends haven’t increased substantially in the recent past.
Because the railroad industry is cyclical, it’s affected by changes in manufacturing and industrial output. Industrial production in the US declined in 2015 after being rangebound from 2011 to 2014. However, after 2015, this production declined and was reflected in the downward or stagnant stock prices of railroad companies.
The above graph shows that among all US Class I railroads, Norfolk Southern (NSC) has the highest forward yield of 2.14%. Major Western US carrier Union Pacific (UNP) follows NSC with a forward dividend yield of 2.11%.
Canada’s largest freight rail carrier, Canadian National Railway (CNI), ranks third in terms of its forward dividend yield of 1.96%. CNI is currently grappling with the firing of its CEO and a variety of operational issues that have impacted its service abilities. This resulted in its stock price erosion, increasing the forward dividend yield.
NSC’s competitor CSX (CSX) has a yield of 1.6%. CSX stock had the highest return among its peer group railroad companies. The company also announced that it would increase its current stock buyback to $5.0 billion, which also lowered the company’s forward dividend yield. CSX stock has priced in market expectations from the margin benefits arising from its operational turnaround plan.
As the smallest Class I railroad in the US, Kansas City Southern’s (KSU) yield stands at 1.29%.
CNI’s prime competitor in Canada, Canadian Pacific (CNI), has the lowest yield of 1.07% in the peer group. CP’s industry-leading operating margins and its expected double-digit earnings per share growth rate has boosted its recent stock price. This trend resulted in a lower forward dividend yield for the company.