With those factors in mind, let’s take a closer look at Norfolk Southern.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $24 billion | Pass |
| Consistency | Revenue growth > 0% in at least four of five past years | 3 years | Fail |
| Free cash flow growth > 0% in at least four of past five years | 2 years | Fail | |
| Stock stability | Beta < 0.9 | 1.13 | Fail |
| Worst loss in past five years no greater than 20% | (12.8%) | Pass | |
| Valuation | Normalized P/E < 18 | 14.41 | Pass |
| Dividends | Current yield > 2% | 2.6% | Pass |
| 5-year dividend growth > 10% | 15.1% | Pass | |
| Streak of dividend increases >= 10 years | 11 years | Pass | |
| Payout ratio < 75% | 35.7% | Pass | |
| Total score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Norfolk Southern last year, the company has dropped a point, as declining revenue over the past year cost it on its score. The stock has done fairly well, though, rising 15% over the past year.
Railroads have capitalized on the cost advantage their energy efficiency gives them. But geography has a lot to do with relative success, and Norfolk Southern Corp. (NYSE:NSC) and fellow eastern U.S. railroad CSX Corporation (NYSE:CSX) have had to deal with the unique challenge of seeing coal volumes decline substantially. By contrast, less coal-dependent railroads Union Pacific Corporation (NYSE:UNP) and Canadian National Railway (USA) (NYSE:CNI) haven’t had to face that handicap, leaving them better able to capitalize on new trends. One big profit producer has come from transporting oil via rail from areas like the Bakken, where insufficient pipeline capacity exists to move energy products by more conventional means.
But Norfolk Southern Corp. (NYSE:NSC) doesn’t intend to get left behind. In January, the railroad said it would invest $2 billion this year on capital improvements, with spending going toward replacing and maintaining its existing network, buying new locomotives and railroad cars, and investing in technology and facilities, among other things. Still, with that amount coming in 11% less than last year’s capex figures, Norfolk Southern will have to be more efficient with its spending.
The big question for Norfolk Southern Corp. (NYSE:NSC) is whether coal demand ever comes back. At low prices, export demand may eventually start to pick up, with coal companies Arch Coal Inc (NYSE:ACI) and CONSOL Energy Inc. (NYSE:CNX) having projected big increases in export volumes over the remainder of the decade. Norfolk remains ideally situated to handle that coal when it becomes available.
For retirees and other conservative investors, Norfolk Southern’s solid dividend yield, reasonable valuation, and track record of raising its payouts are all points in its favor. As long as transportation alternatives remain pricey, Norfolk Southern should provide good returns for those who hold it in their retirement portfolios.
Keep searching
Finding exactly the right stock to retire with is a tough task, but it’s not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.
The article Will Norfolk Southern Help You Retire Rich? originally appeared on Fool.com is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
