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Are US Railroads Poised for Higher Dividend Growth in 2018?

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US railroads’ second-quarter earnings

All US Class I railroads have reported their second-quarter earnings. Genesee & Wyoming (GWR), the non-dividend paying, non-Class-I railroad, announced its second-quarter earnings on July 27. It was the last among major US railroads to reports its Q2 earnings.

The second quarter was good for railroad (IYJ) stocks from an earnings point of view. Most of them were able to surpass analysts’ adjusted earnings estimates in the quarter. Overall, the first half of 2018 was also good for railroad stocks.

A close observation of railroad stocks reveals that their prices have gone up since their first-quarter earnings. Naturally, that piques investor curiosity for the stocks. Investors are always looking for stocks that offer capital appreciation or dividend growth.

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Railroad stocks and dividends

At the end of the first quarter, we published a series on railroad stocks and whether they’re meant for dividend investors. US tax reforms offered a case for a rise in cash distribution by major railroads in the form of either stock buybacks, higher dividends, or a combination of both. Now, raising dividends also depends on the internal growth assessment by these railroads.

Six months of 2018 have passed, and we see that most railroads haven’t upped their capital expenditure projections for the year. Lower taxes have given a boost to their operating cash flows, as evident from their cash flow statements. The situation makes a case for increasing stock repurchases or raising the dividend growth rate.

Three major US railroads—Union Pacific (UNP), Norfolk Southern (NSC), and CSX (CSX)—have increased their budgets for stock buybacks, which would spread over 2018 and partly into 2019. That’s good news for investors. Capital appreciation and increased dividends are win-win situations for investors. Recently, UNP and NSC declared a quarterly cash dividend. Let’s start with Union Pacific.

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