Strong Railway Network Keeps NSC Competitive…

Norfolk Southern Corp. is one of the nation’s premier transportation companies. It is the owner of a major freight railroad, Norfolk Southern Railway Company that operates approximately 19,500 route miles in 22 states and the District of Columbia and serves every major container port in the eastern U.S. It operates the most extensive intermodal network in the East and is a principal carrier of coal, automobiles, and automotive parts. It is the largest originator of finished vehicles and provides service to 55 intermodal terminals and major East Coast ports. Its intermodal network offers direct accessibility to containers, equipment, and logistics solutions to ensure that goods are shipped safely and efficiently from origin to destination.

Norfolk Southern is a major transporter of industrial products, including chemicals, agriculture, metals and construction materials. Total merchandise products account for nearly 60% of revenues, followed by intermodal (25%) and coal (15%). Norfolk’s network systems reach many manufacturing plants, electric generating facilities, mines, distribution centres, transloading facilities, etc. in its service area. The company is known for its superior and reliable service product.

Investment Data

Revenue Growth & Market Exposure

Norfolk’s revenues can be broadly classified into revenue from railway operation, merchandise commodity, intermodal, coal, and freight rates. Over the years, Norfolk has earned customer trust for safely and reliably moving their goods. It registered solid train performance and terminal dwell that drove near record car level velocity and strong asset utilization for the company and its customers.

Norfolk Southern is making good progress in precision scheduled railroading (PSR) that is widely adopted by most of the Class I railroads in North America. It has completed two out of three phases of its PSR efforts. The adoption of PSR should lead to a reduction in its operating ratio, which will eventually lead to better operating earnings. The company has already registered an improvement in its OR from 72.8% in 2015 to 64.7% in 2019 and is expected to reach the 60% mark by 2020. It also launched a TOP21 operating plan to transform its railroad and improve its service product.

Norfolk Southern continues to make investments in railway infrastructure to ensure safety and efficiency. Its focus on superior service products and ongoing pricing and productivity initiatives should support margin growth in the future. Over the years, Norfolk has registered improvement in its operating metrics such as a 40% increase in service delivery index, 34% improvement in T&E productivity, and 12% improvement in train weight, etc. There have been over 500 locomotive elimination and the company is investing in fleet modernization, heavier trains, higher utilization, etc. It achieved a locomotive fleet reduction of 20% and a workforce reduction of 8% in the last year. The company expects to spend 16%-18% of its revenues on capital investments. Norfolk Southern’s revenue per unit increased YoY for the last 12 quarters despite the market cycles over that period of time.

Dividends

Norfolk Southern is a Dividend Starter and has been paying dividends for 150 consecutive quarters. The company raised the quarterly dividend twice in 2018, for an overall increase of 31% and total payouts of $844 million. It also repurchased nearly $2.8 billion of the company’s shares. Norfolk Southern pays a dividend currently yielding 2.1% and has a low dividend payout ratio of 36%. Its last annual dividend hike was ~24% and it has grown dividends at a rate of 9.5% CAGR over the last decade. Norfolk’s EPS has also registered a CAGR growth rate of 7.6% during the same time.

Norfolk’s cash flow from operating activities was $3.9 billion in the last year and free cash flow for the year was a record ~$1.9 billion. Dividends and share repurchases for the year totalled over $3 billion. Its target payout ratio stands at 33% with remaining cash and borrowing capacity to be used for share repurchases.

Norfolk sports a high credit rating of BBB+ and Baa1. The company’s relentless focus on efficiency-related cost savings should result in improved metrics. PSR adoption, further makes it one of the best-positioned railroad companies to benefit. Norfolk expects the momentum to continue in 2020 as it remains dedicated to the operational transformation.

Competition

Norfolk’s primary rail competitor is CSX Corporation operating in most of the same territory as the company. CSX is a premier transportation company based in Florida, providing services like traditional rail service and the transport of intermodal containers and trailers. Norfolk also competes with motor carriers, water carriers, and shippers. A large base of U.S. consumers, primarily in the manufacturing and energy sectors, a robust and comprehensive merchandise portfolio, and diversified and balanced coal franchise are Norfolk’s major competitive strengths.

Bottom Line

Freight services and railways are an essential component of an economy and as a leading transportation and logistics company in North America, Norfolk Southern is favourably placed to benefit from its position. Its impeccable reputation for safe and sound movement of goods and on-time deliveries have made it an obvious choice for its customers. An extensive asset base, diversification across products, geographies and a decent payout ratio should help the company continue its dividend growth streak in the future.