Canadian Pacific Railway’s (CP) latest quarterly dividend announcement of 0.65 Canadian dollars per share translates into an annualized dividend of 2.6 Canadian dollars per share. Based on the adjusted EPS of 7.87 Canadian dollars in the last four quarters, the railway’s dividend payout was at 33% as of September 21.
The railroad’s highest dividend payout ratio in the last ten years was 48% in 2012, while the lowest ratio was ~15% in the fourth quarter of 2017. Currently, Canadian Pacific Railway’s dividend payout ratio is almost in the middle of its highest and lowest dividend payout ratio.
Railroads’ dividend yield
The above chart shows that US Class I railroads (XTN) have a low dividend yield. Railroads incur a maintenance capex, which normally accounts for 40%-50% of their total capex. The maintenance capex requires that the railroads reinvest more in the business. Higher capex levels consume a lot of free cash flow, which restricts the scope for higher dividend payments and stock buybacks.
As a percent of the outstanding common stock, Union Pacific (UNP), Norfolk Southern (NSC), and CSX’s (CSX) share repurchases are much higher compared to other railroads like Kansas City Southern (KSU), Genesee & Wyoming (GWR), and Canadian railroads.
Canadian National Railway (CNI) followed Union Pacific with a dividend yield of 1.6%. The same metric for Norfolk Southern and CSX stood at 1.6% and 1.2%, respectively. Kansas City Southern has a yield of 1.3%. Railroads’ forward dividend yield has gone down in recent quarters due to appreciation in the stock price and a higher dividend growth rate.
Stock buyback programs
In the first quarter, Canadian Pacific Railway completed the first of its two stock buyback programs announced in December 2017. The railroad repurchased 134,000 common shares for 29.5 million Canadian dollars. Considering Canadian Pacific’s higher YoY (year-over-year) capex-to-revenue ratio of 19.2% in the first half of 2018, the railroad might not increase the dividend in 2018. Canadian Pacific Railway isn’t a US-originated railroad. As a result, the company won’t fully realize the benefits of lowers taxes, unlike US-originated railroads.