Norfolk Southern Corp. (NSC): Why This Railroad Is a Compelling Buy

Once again, coal revenues were an area of weakness, dropping 17% year over year. Coal has served as a drag on the nation’s railroads due to a number of industry headwinds in recent quarters. In particular, mild winter weather and low natural gas prices have depressed both coal volumes and average revenue per unit.

However, it’s worth noting that coal revenues made up just 23% of Norfolk Southern Corp. (NYSE:NSC)’s revenues in the first quarter, with its general merchandise business making up more than half of its sales.

Going forward, it’s reasonable to assume natural gas prices won’t stay at depressed levels forever. This should bring utility customers back to coal, and it’s fair to think that coal prices and volumes should recover at least moderately in the future.

NSC: Compelling value and income

Norfolk Southern is firmly committed to returning cash to shareholders. The company raised its dividend last year by 6% and will likely increase its shareholder payout in time for its next quarterly distribution.

At recent prices, Norfolk Southern’s $2 per share annualized distribution yields 2.8%, which exceeds both the yield on the broader market as well as the 2.6% yield on the 10-Year Treasury.

Moreover, Norfolk Southern Corp. (NYSE:NSC) is attractively valued when compared to both its industry and the broader market. Whereas both the S&P 500 Index and the railroad industry hold price-to-earnings ratios in the high teens, Norfolk Southern changes hands for just 12 times its trailing earnings per share.

Union Pacific and CNI are profitable railroads, but they both trade for 17 times trailing earnings and offer dividend yields less than 2%.

As a result, while each of these three is investment worthy, Norfolk Southern offers the best value and income for new investors. I consider Norfolk Southern to be the industry leader and an attractive buy.

The article Why This Railroad Is a Compelling Buy originally appeared on Fool.com and is written by Robert Ciura.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.