Sector Overview – Railroads

Fewer investments garner as much as attention to the pulse of the economy as the railroad sector. The railroads are considered a leading indicator for the overall health of the economy as transportation of goods is critical and gives investors a sense of how companies and consumers are spending their money. If we observe legendary investors such as Warren Buffett and Bill Gates – it is clear that they are fans of the railroad companies and believe in the long term prospects with Buffett’s Berkshire Hathaway buying out Burlington Santa Fe (BNSF), taking it private and Gates’ Cascade Investments holding a sizeable position in Canadian National Railway. Railroads are what we call a wide-moat industry sector – where it is extremely hard for new entrants to get established and challenge the incumbents. This makes the railroads very attractive for long term investors.

Whether transporting crude, lumber, merchandise, agricultural or industrial products, railroads are what keeps the economy moving. While the transportation for entities such as coal (which used to be the largest users of railroad services a few years ago) has fallen due to the fall in crude prices and rise of green energy alternatives, the transportation need for crude saw significant rise in the recent past. However, the recent turn of events with falling energy prices, has put a damper on crude transportation via railroads. The following chart from Association of American Railroads shows the trend in traffic for various payloads.

raildata

Sector Overview – Railroads

The North American railroad industry is made up of just six companies: Union Pacific Corp, Canadian National Railway Company, CSX Corp, Norfolk Southern Corp, Canadian Pacific Railway Ltd, and Kansas City Southern. All numbers used below are in US$.

Company Ticker Market Cap Rail Network Yield
Union Pacific Corp UNP $80.57B 31,000 miles 2.37%
Canadian National CNR.TO / CNI $49.05B 20,000 miles 1.57%
CSX Corp CSX $29.18B 21,000 miles 2.43%
Canadian Pacific CP $25.47B 13,700 miles 0.68%
Norfolk Southern NSC $24.73B 20,000 miles 2.88%
Kansas City Southern KSU $10.88B 6,500 miles 1.34% 

The following charts provide an overview comparing the railroads

Railroads - Mkt Cap

Railroads - Yield

Union Pacific Corp

UNP map

Union Pacific Corp (UNP) is the largest railroad company in North America. The company operates west of the Mississippi river and has a rail network operation of approx 31,000 miles. The company is one of the best run in the industry and has a great operating margin at 37%.

UNP is a Dividend Challenger having raised dividends for 9 consecutive years. The dividend growth rates for 1-, 3-, 5- and 10-yr periods are 22.0%, 23.2%, 27.3%, and 19.7%, respectively. With an initial yield of 2.37%, UNP’s Chowder Rule number of 29.67. Current payout ratio stands at a manageable 36%.

The biggest risk UNP faces is that the rail map directly overlaps that of Burlington Santa Fe, a company that is a subsidiary of Berkshire Hathaway – which is investing heavily after taking the company private to upgrade their network and operate more efficiently.

Read my dividend stock analysis for Union Pacific here >>

Canadian National Railway Company

CNI map

The Canadian National Railway Company (CNR.TO, CNI) is the second largest railroad company in North America. It is the only company operating rail networks serving three coasts – Pacific, Atlantic and Gulf coasts; a network of approx 20,000 miles. CN has the best operating margin in the industry at 39.6%.

CNI is a Dividend Champion having raised dividends for 18 consecutive years. The dividend growth rates for 1-, 3-, 5- and 10-yr periods are 9%, 11.3%, 15.2%, and 17.4%, respectively. With an initial yield of 1.57%, CNI’s Chowder Rule number of 16.77. Current payout ratio stands at a manageable 27.9%.

Read my dividend stock analysis for Canadian National here >>

CSX Corp

CSX map

CSX Corp (CSX) is the third largest railroad company in North America – with rail network east of the Mississippi river serving 2/3 of the US population with a network of approx 21,000 miles. CSX’s operating margin is 29.9%.

CSX is a Dividend Champion having raised dividends for 11 consecutive years. The dividend growth rates for 1-, 3-, 5- and 10-yr periods are 6.8%, 12.1%, 16.5%, and 25.2%, respectively. With an initial yield of 2.43%, CSX’s Chowder Rule number of 18.93. Current payout ratio stands at a manageable 32.8%.

Read my dividend stock analysis for CSX Corp here >>

Canadian Pacific Railway Ltd

CP map

Canadian Pacific is the smaller of the two Canadian railroads operating mostly in Canada but with some extensions into the US market. The company operates approx 13,700 miles of railroad and has an operating margin of 38.3%.

CP has lost its dividend growth streak after failing to raise dividends since 2013. However, the current payout ratio stands at a manageable 15.2%. CP approached CSX earlier this year proposing a merger to create the second largest rail network in North America, but the deal did not gather traction as CSX rejected right away.

Read my dividend stock analysis for Canadian Pacific here >>

Norfolk Southern Corp

NSC map

Norfolk Southern Corp (NSC) operates a rail network east of the Mississippi river directly competing with CSX Corp. The company operates approx 20,000 miles of rail network and has an operating margin is 29.6%.

NSC is a Dividend Champion having raised dividends for 14 consecutive years. The dividend growth rates for 1-, 3-, 5- and 10-yr periods are 8.8%, 10.2%, 10.3%, and 20%, respectively. With an initial yield of 2.88% – the highest in the industry, NSC’s Chowder Rule number of 13.18. Current payout ratio stands at a manageable 39.5%.

Read my dividend stock analysis for Norfolk Southern here >>

Kansas City Southern

KSU map

Kansas City Southern (KSU) is the smallest of the railroads – serving the Southern US and Mexican markets. The company operates a rail network of approx 6,500 miles and has an operating margin is 32.6%.

KSU started paying dividends in 2012 and has a relatively short dividend payment history. Current payout ratio stands at a manageable 25.6%.

Read my dividend stock analysis for Kansas City Southern here >>

Summary

Railroads provide a great long term investment opportunity as they provide a wide moat and are a critical part of the economy. A small space with just six major players in the North American space, the railroad sector has great operating margins and provide consistent dividends and dividend growth for income-focused investors. The following table provides a summary  of the metrics as of this date of writing.

Railroad - Summary

Do you own stocks in this sector? Which ones do you own and what are your thoughts on the future of the industry and companies mentioned. Share your thoughts below.

Full Disclosure: Long CNR.TO. My full list of holdings is available here.

 Image Credit: Jerry Huddleston

18 thoughts on “Sector Overview – Railroads

    • Glad you liked it, MMM. Will stop by and check out your blog. RR provide an essential service and play such an important role in our economy — definitely worth the investment in atleast one of the RRs in any portfolio. They provide a fantastic combination of current yield and dividend growth.

      best
      R2R

  1. R2R,
    Good post comparing the various railroad companies. Cool to see all the maps together like this. I own CSX and am considering adding to it, or adding some UNP. Many of the rails look attractive here, so this was a timely article.
    -RBD

    • CSX doesnt get as much love from other DGIs as much as it should I think its a great company and in some ways better than NSC – which gets more love from DGIs for some reason. UNP is definitely one of the best run companies…really attractive valuations here – I am looking to add a second one to my portfolio.

      Best wishes
      R2R

  2. Great article buddy. I like the summaries coupled with maps of each company’s network. We own Union Pacific, and have a limit order to buy more around $90. I will initiate a position in CNI at some point “down the line”, once I think the commodity collapse is fully priced in. Again, great post.
    -Bryan

    • Glad you like it, Bryan. UNP is a great company and I would love to own it. $90 sounds like a good price to get in. I hope you get to pull the trigger there. CNI is by far my fav in the industry and I own it. It was just disclosed this morning that Bill Gates’ firm has increased their stake in CNI further more over the past few months. With the best margins in the industry, whats not to love in CNI? 🙂

      Thanks for stopping by
      R2R

  3. R2R,

    Great overview of the railroad sector. Although I do not currently own shares in any companies within this sector, I am strongly considering initiating a position in UNP by the end of this month (right before the ex-divy date). The 2.4% yield has certainly become attractive and I believe UNP’s history of solid dividend growth should continue for the foreseeable future.

    DC

    • For sure, DC. The company is well run and will do great over the long run. The yield is also currently very attractive.

      Thanks for stopping by and the comment. I will drop by and check out your blog.

      Best wishes
      R2R

  4. Great timing!

    I was preserving cash for a rental, but it didn’t go through. Now, with the market pullback, it’s time to average down on some of my position.UNP and NSC are on my portfolio. They cover 2/3 of the States the prospect is great at these prices.

  5. R2R,

    Long UNP myself. I like them all, but KSU and CP are not nearly as exciting right now. In the long run they are not going anywhere, even if there are less commodities there will always be something that needs moving.

    Good overview of the sector,
    Gremlin

    • Agreed, DG. Theres always going to be something to ship across from one place to another – and railroads are the best and most efficient way to do it. I am actually pretty surprised with CP’s progress lately – they have improved their business quite a bit lately and their operating margins have improved a lot. Too bad the dividend is low and they lost the streak.

      cheers
      R2R

  6. The railroads are fantastic! People can speculate on new nanotechnology all they want, but there’s nothing like the basics and necessities. Until we either no longer ship goods in bulk or we invent teleportation technology, we will always need railroads. We use them and give them our money everyday and don’t even realize it. What a wonderful business to be in!

    I have CSX and NSC in my portfolio, but I’m looking to pick up UNP to diversify into the western half of the US. Then, I would own most of the rail in this country! I almost feel like a supervillain saying things like that.

    I was surprised to see a commercial for NSC while watching TV recently. I also remember as a little kid watching the Peanuts special about the Transcontinental Railroad. The fact that UNP is still around and paying a rising dividend is a testament to how great a business it is and how great a sector it is in.

    Thank you very much for these sector-specific write-ups. It’s great to learn what types of businesses are profitable over the long term and which ones are risky, dangerous, or speculative.

    Sincerely,
    ARB–Angry Retail Banker

    • Thanks for sharing your thoughts, ARB.
      Railroads are a fantastic business indeed…and you summarized it well – unless we completely stop shipping or invent teleportation, railroads will stay in business. Its one of the cheapest and most efficient ways to transport goods. The last few years were boom years as the crude-by-rail took off and was seeing some amazing growth in the industry, but since the fall of crude prices and the construction of oil & gas pipelines, that rise has fallen spectacularly as well. Nevertheless, I am very bullish on the industry.

      Interesting picks with NSC and CSX – they both seem to have overlapping networks – and are direct competitors with one another…although CSX has a slightly bigger network and service places like FL that NSC doesnt. UNP would be a great addition expanding your reach to the western US. Interestingly, UNP just got downgraded this morning and has fallen well below $90 and is looking very attractive indeed. I am tempted more than ever to initiate a position in UNP now.

      Glad you liked the article. Always appreciate you dropping by and sharing your thoughts
      R2R

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