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Do KSU’s Free Cash Flow Levels Indicate a Dividend Rise in 2018?

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Aug. 21 2018, Published 12:26 p.m. ET

Factors benefiting railroad companies

Most major railroad companies (XTN) have raised their quarterly dividends per share in 2018. Lower taxes due to the Tax Cuts and Jobs Act along with relatively low capex levels this year have contributed to the dividend rises.

Railroad stocks specifically benefited from the provision of deduction capex for tax calculation purposes in the year it was incurred.

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KSU’s free cash flow

FCF (free cash flow) is important to consider in terms of share repurchases, dividend payments, and the plowing back of earnings. FCF is determined by deducting capex from OCF (operating cash flow). Higher OCF and lower capex will result in higher free cash flow.

Looking at the above graph, we can see that KSU’s FCF fell 54% YoY (year-over-year) in the first half of 2018. From $131.5 million in the first half of 2017, the company’s FCF fell to $59.6 million in the first half of 2018. Given its quarterly dividend payment of ~$37.0 million, KSU’s FCF level is adequate to support this dividend payment.

KSU’s capex

KSU’s capex-to-revenue ratio was ~20% in the first half of 2018 and 22.5% in the same period last year, meaning that KSU has a lower capex budget for this year. However, the company’s ratio is on the high side among major Class I railroad companies.

Its operating cash flow in the first half of 2018 was $425.0 million, up 2.1% from $416.0 million in the same period last year. Lower capex-to-revenue levels for major railroad companies such as Union Pacific (UNP), Norfolk Southern (NSC), and CSX Corporation (CSX) have aided their dividend growths this year. Considering Kansas City Southern’s FCF trend in the last few quarters, it’s unlikely that it will raise its dividend in 2018.

In the next section, we’ll compare KSU’s dividend payout with those of its peers.

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