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Norfolk Southern: Investors’ Industry Favorite in 2019

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Norfolk Southern outperformed peers

Norfolk Southern (NSC) has been investors’ industry favorite since the beginning of 2019. The stock has risen 21.3% YTD (year-to-date). Norfolk Southern has significantly outperformed most of its peers’ returns. A series of positive events including dividend hikes, strong fourth-quarter results, and the bullish long-term operating outlook led to the massive upswing in Norfolk Southern’s share price during the past two months.

The stock has outpaced CSX (CSX) and Kansas City Southern (KSU), which have risen 17.2% and 16.8%, respectively, during the same period. With a return of 22.7% YTD, Union Pacific (UNP) is the highest gainer among Class I railroad companies.

Norfolk Southern stock has also outpaced the Industrial Select Sector SPDR ETF’s (XLI) YTD. XLI had risen 18.8% YTD.

What’s driving the optimism?

Back-to-back quarters with strong financial results instilled investors’ confidence in the Norfolk Southern stock. The company beat analysts’ consensus estimates in all of the past nine quarters.

On January 24, Norfolk Southern reported better-than-expected fourth-quarter results. The company’s adjusted EPS rose ~52% YoY to $2.57 due to higher revenues and lower costs. The company witnessed strong double-digit earnings growth in all four quarters in 2018.

Norfolk Southern’s sustained focus on enhancing shareholders’ wealth through dividend payments and share buyback makes it investors’ favorite stock in the sector. On January 23, the company raised its quarterly cash dividend rate 8% to $0.86 from $0.80. Norfolk Southern has been paying a regular dividend for the last 146 quarters. Last year, the company returned $3.6 billion to shareholders in the form of dividend payments and share buybacks.

Norfolk Southern’s bullish long-term operating outlook has also helped it gain investors’ confidence. On February 11, the company revealed its new strategic plan. Norfolk Southern to bring down its operating ratio to 60% by 2021 from 65.4% in 2018.

To attain the desired operating ratio, Norfolk Southern has adopted the PSR (precision scheduled railroading) system. The PSR principles help railroad companies reduce network complexity and improve operational efficiency. Adopting PSR principles helped several companies including Canadian National Railway (CNI) and Canadian Pacific (CP) attain a better operating ratio.

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