Norfolk Southern Stock Dividend Review & Stock Analysis

Norfolk Southern Stock Dividend Growth Is Resilient

Let’s jump into the industrial sector by taking a look at the Norfolk Southern stock dividend.

When it comes to investing, diversification is very important.  Even more so for dividend stock investors. Because many good quality dividend stocks are clustered in just a few sectors.

Industrial companies, like Norfolk Southern, are heavily exposed to the ups and downs of economic cycles. As a result, they are not your typical dividend stock favorites.

But Norfolk Southern (NYSE: NSC) is one dividend stock that I like. And have owned for many years.

So certainly, I will have some thoughts on the Norfolk Southern stock dividend. Including dividend growth, and a view on dividend safety.

Moving right along…

Norfolk Southern stock dividend review

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

Norfolk Southern Stock Dividend Review – Key Takeaways

NSC is a well-run company with a long history.  It has large barriers to entry that protect its financial viability. However, the company is susceptible to the shorter-term ups and downs of economic cycles.

The Norfolk Southern dividend looks safe. And the dividend is well covered based on earnings and cash flow.

Both earnings and Norfolk Southern dividend growth have been very strong in recent years. However, the company’s dividend yield is a bit low for my liking. And, dividend growth slowed temporarily. Due to the most recent recession.

Next, a couple of quick “housekeeping notes”…

Are you interested in investing in transportation companies? Then, be sure to check out: this UPS dividend stock review. The company is an elite logistics and transport business and is benefiting from the surge in e-commerce.

Or, check out dozens of other dividend stocks and dividend investing articles. They are summarized on our dividends resources page. For your convenience.

On the other hand, if you came for additional information on Norfolk Southern stock and its dividend, let’s go…

Norfolk Southern Company Background

NSC operates nearly 20,000 miles of railroad. They do so in more than 20 states and the District of Columbia.  And serve every major container port in the eastern United States. 

They also have the most extensive intermodal network in this region. And provide efficient connections to other rail carriers.

NSC is a major transporter of industrial products. Some of these products include coal, automotive parts, automobiles, chemicals, metals, and construction materials.

Source: Norfolk Southern Corporate Profile

NSC Strategic Plan

To grow, Norfolk Southern looks to improve shipping volumes in 3 main areas:

  • Merchandise
  • Intermodal (train to truck and truck to train)
  • Coal

The approximate share that each area contributes to total revenues is shown in the pie chart below.

Chart 1 : Norfolk Southern Revenue By Segment

NSC stock analysis: revenue by business segment

Efforts to grow revenues can be significantly influenced by overall economic activity. And, commodity prices. Shipping demand is therefore subject to many factors that are out of the company’s control.

So, Norfolk Southern’s growth strategy also focuses on operational performance. They have several major initiatives to improve profit per sales dollar that include:

  • Improved tons delivered per employee, train and locomotive
  • Higher utilization of cars in service
  • Enhanced service & delivery for customers

Efforts in these areas have delivered higher profits in recent years.

Norfolk Southern Stock Symbol

Finally, Norfolk Southern stock trades on the New York Stock Exchange. It operates using the ticker symbol NSC (NYSE: NSC).

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Okay. That’s enough about the company’s operations. Let’s do the stock research next to uncover all of the facts and figures about the Norfolk Southern stock dividend next.

Norfolk Southern Stock Dividend Per Share

NSC pays an annual forward dividend of $3.96 per share.

The annual forward dividend is the last dividend payment approved by the company. Multiplied by the number of times a stock pays dividends each year.

Norfolk Southern Stock Dividend Yield

The annual dividend represents a 1.5% Norfolk Southern dividend yield. At the recent Norfolk Southern stock price.

Stock dividend yields can change quickly and frequently. They have an inverse relationship with the stock price.

So, rising stock prices mean falling dividend yields. And, vice versa.

How Often Does NSC Pay Dividends?

Norfolk Southern pays dividends to shareholders on a regular basis. Specifically, every 3 months or 4 times per year.

That makes NSC a quarterly paying dividend stock. And each of those dividend payments is one-fourth of the annual dividend rate.

When Does Norfolk Southern Pay Its Dividends?

As a shareholder, you will receive regular dividend payments from NSC in the same months each year. Those months are March, June, September, and December.

Norfolk Southern’s dividend payment dates are typically on the 10th day of these months. Unless that day falls on the weekend. Then the dividend is paid the following business day.

Norfolk Southern Ex-Dividend Date

To receive the next NSC dividend payment, you must complete your purchase before the ex-dividend date.

First of all, NSC’s ex-dividend date falls in the month PRIOR to when it pays dividends. Furthermore, the ex-date usually falls during the first week of those months.

Finally, the ex-dividend date is slightly different each quarter. So, it’s best to check NSC’s dividend information on its investor relations website.   You can get the exact date for each dividend payment there.

Most dividend stock investors, like you and I, buy and hold our dividend stocks. By doing so, we receive every future dividend NSC pays out.

There is no need to worry about the ex-dividend date. As an ongoing shareholder, the most important date is the payment date. That’s when we get our cash.

Norfolk Southern Stock Dividend History

Norfolk Southern Corporation (NSC) was created as a holding company in 1982. It acquired Norfolk & Western Railway and Southern Railway to begin operations under the new name.

NSC has paid regular quarterly stock dividends since 1982. Never having missed a quarter.

Norfolk Southern had increased its annual dividend every year starting in 2017. However, this relatively insignificant dividend increase streak doesn’t tell the whole story.

As the Norfolk Southern dividend payout ratio rose during 2015, the company temporarily slowed the rate of dividend increases in 2016. If it were not for that one-year pause, the annual NSC dividend increases would date back to 2002.

But this pattern of dividend growth doesn’t mean that NSC hasn’t increased its dividend rapidly. Let’s look at dividend growth next to prove this out.

Norfolk Southern Stock Dividend Growth Rate

As shown in the chart below, dividend growth has been very strong in recent years. This comes mainly from the strength of the 2018 and 2019 dividend increases.

Table 1: NSC Compound Annual Dividend Growth Rate

1 Year3 Years5 Years7 Years
4.4%15.5%9.8%9.1%

Because the Norfolk Southern dividend increased twice during those years, 2018 and 2019. Before 2018, the company’s dividend increases were at a much lower rate.

Norfolk Southern Dividend Policy Statement

I appreciate it when a company states its dividend policy. And Norfolk Southern has done just that. Their goal for the dividend is to payout 35%-40% of accounting earnings.

This came from a recent earnings presentation. Previously, I saw this policy statement in a previous year’s investor day presentation. The latest communication indicates a slight increase to their dividend payout ratio target.

Furthermore, Norfolk Southern is an economically sensitive company. It has large capital investment requirements.

As a result, a relatively low dividend payout ratio is justified while still rewarding shareholders with consistent dividends. And their stated target payout ratio looks good to me.

Norfolk Southern Revenue Trend

Revenue has held in a fairly tight range over the past several years.

Chart 2: NSC 7-Year Revenue Trend

Norfolk Southern stock analysis: revenue trend

It was negatively affected early in the decade as the economy emerged from the great recession.  Also, lower prices for natural gas in subsequent years reduced the demand for coal shipments.

On the other hand, the company’s revenue growth has been positively affected by intermodal transportation.  The strength in intermodal is a result of rising consumer spending, e-commerce growth, and a tight trucking market.

Finally, the economic shut downs during 2020. Clearly took its toll on that years revenue base.

Norfolk Southern Dividend Payout Ratio Based On Earnings

Norfolk Southern has been able to grow profits through price increases.  And cost controls over labor, equipment, and fuel. In addition, the 2017 tax act has lowered taxes and increased income in 2018 and beyond.

Look at the big increases in earnings per share in 2018 and 2019 shown in the chart below. No wonder Norfolk Southern Management was been comfortable with multiple dividend increases in those years!

Chart 3: NSC 7-Year Trend of Earnings & Dividends Per Share

NSC Dividend Payout Ratio

I like fast dividend growth. But only if it is supported by earnings and cash flow.

But, the recession of 2020 had it’s impact. Generating a reduction in accounting profits for the year.

These dynamics have led to a dividend payout ratio of about 48% based on accounting earnings. This is a comfortable payout rate for a company that can be subject to the ups and downs of the economic cycles. And, it is close to the dividend policy Norfolk Southern management has set for itself.

I suspect earnings will recover in 2021. And bring NSC’s dividend payout ratio down. And, in line with management’s stated target.

Because a lower dividend payout ratio is generally better.  It shows the company has ample room to raise the dividend in the coming years.  Or, withstand an earnings drop without having to reduce the dividend.

Furthermore, a lower dividend payout ratio is wise for an industrial company. Since their business requires large capital investment. And, is subject to changing economic conditions that are out of their control.

Norfolk Southern Dividend Payout Ratio Based On Free Cash Flow

Speaking of large capital investment requirements, the chart below shows the amount of cash leftover from NSC’s operations after spending on capital investments.

That is the definition of free cash flow. And it is from free cash flow that a company’s recurring dividends are paid.

Chart 4: 3-Year Trend of NSC Dividends And Cash Flow

NSC dividends and cash flow

It makes sense that Norfolk Southern has large amounts of capital outlays. Locomotives, rail cars, and railroad tracks cost a lot of money to purchase and maintain.

Even so, our dividend payments have been consuming just a little over 40% of free cash flow during the last 3 years.

Cash flow is important. It is a good cross-check against accounting earnings for evaluating the dividend and its safety.

Norfolk Southern 2020 Business Fundamentals

The economic shutdowns of 2020 clearly had a negative impact on Norfolk Southern’s business activity. As a result, revenue and earnings declined versus 2019.

But, being a company with good cash management practices, free cash flow actually increased. And supports the company’s recent decision to raise the dividend again.

But let’s think long-term. What does it hold for Norfolk Southern dividend growth…

Norfolk Southern Dividend Growth Projection

For my financial planning purposes, I like to make a dividend growth forecast for all of my dividend stock holdings. I take into account several factors discussed so far:

  • The historical dividend growth rate
  • Number of consecutive annual dividend increases
  • Company dividend policy
  • Dividend payout ratio based on earnings and cash flow
  • Cyclical nature of the business
  • Company growth strategy

Taking into account what I have learned thus far, I do not believe the NSC dividend will grow as rapidly as it has in recent years. All it would take is for another recession to emerge. For dividend growth to be put on hold for a while.

I don’t expect any of that to happen. I see increasing dividends moving forward. As a result, I’m going to forecast a 6-7% long-term annual dividend growth rate.

Not entirely by coincidence, 7% annual dividend growth is what Norfolk Southern has been able to deliver over the past 25 years. A long period like this takes into account the ups and downs of multiple economic cycles.

Consistent dividend growth from dividend stocks like NSC is one of the reasons to invest in dividend stocks. At least, in my opinion.

Norfolk Southern Credit Rating

Knowing a company’s credit rating is important.  A good credit rating can make a big difference between companies that struggle. Versus those that hold their own during a recession.

A corporation’s credit rating is similar to how your credit score works. By the way, you can check yours for free using Credit Karma if you like.

Higher credit ratings mean lower risk to those who lend money.  Furthermore, higher ratings mean lenders will be more likely to get their loans paid back on time.

We are not lenders here at Dividends Diversify, we are investors in dividend stocks and dividend-paying ETFs.  However, it never hurts to check out a company’s creditworthiness. Because good credit supports dividend safety.

Norfolk Southern has an investment grade, moderate to low credit risk rating.

The ratings are provided by two of the big rating agencies. Moody’s rates Norfolk Southern credit at Baa1. S&P’s rating is BBB+.

These evaluations represent solid investment-grade credit ratings as shown in the table below. Investment-grade is what most consistent dividend-paying companies are rated.

Table 2: Credit Rating Evaluation Grid

Credit rating evaluation grid for each major rating agency

Norfolk Southern Debt To Equity Ratio

Norfolk Southern’s debt to equity ratio checks in at .9 to 1. This a balanced and fairly conservative capital structure.

I do not like dividend-paying companies that are heavily loaded with debt. And it does not appear that Norfolk Southern has an unmanageable debt load. Modest amounts of debt also enhance dividend safety.

So, let’s talk about dividend safety next.

Norfolk Southern Dividend Safety Evaluation

The dividend payments I collect are very important to me.

Most noteworthy, I do not want to hold a stock that may reduce its dividend. Even the most successful dividend investing approach will underperform when facing dividend cuts from portfolio companies.

As a result, I look at multiple factors to make a judgment on dividend safety:

  • Dividend payout ratio based on earnings
  • Dividend payout ratio based on free cash flow
  • Company dividend history
  • Stated dividend policy
  • Credit ratings
  • Debt to equity
  • Current and future business prospects

In all cases, it appears the Norfolk Southern dividend is safe from a reduction in the foreseeable future. So, I expect to keep collecting the dividend payments as they currently stand on a per-share basis!

Norfolk Southern Stock Valuation

Let’s judge stock value in several ways:

  • Norfolk Southern dividend discount model
  • Morningstar fair value estimate
  • Price to earnings ratio

NSC Dividend Discount Model

The single-stage dividend discount model considers several factors I have discussed thus far.

  • The current annual dividend payment
  • Projected dividend growth
  • My desired annual return on investment – 9%

Using these assumptions, the dividend discount model calculates the fair value of NSC stock at $169 per share.

Morningstar Fair Value

The investment analysis firm, Morningstar, believes Norfolk Southern stock is fairly valued at $193 per share.

Source: Morningstar

NSC Stock Price To Earnings Ratio

The NSC stock price to 2020 earnings sits at about 33 times. With the earnings decline in 2020. The forward NSC stock price to earnings ratio should fall into the 20s again.

Regardless, on a price to earnings basis, NSC stock appears to be trading at a relatively high valuation.

Norfolk Southern Stock Valuation Recap

We have looked at a number of valuation methods that suggest a range of values for NSC stock.

Here is a summary:

  • Dividend discount model – $169 per share
  • Morningstar Fair Value – $193 per share
  • Price to earnings ratio – stock looks pricey

The value measures indicate that NSC stock is overvalued at recent prices.

Norfolk Southern Dividend Stock Analysis – Wrap Up

NSC represents a relatively smaller size position in my dividend stock portfolio.  The stock is 1 of many solid investment options. But looks a little pricey for adding to the shares right now.

But, I intend to hold for the long term. And I would like to add to my position. But only at a price below $200 per share. As of now, we will need a sizeable correction to get to that price.

But that’s okay. I like being patient. Especially when receiving good investment returns from share price increases.

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Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

I own NSC stock and collect the Norfolk Southern Stock Dividend

4 thoughts on “Norfolk Southern Stock Dividend Review & Stock Analysis”

  1. Hi Tom,

    I agree with what you say. It sounds like a good diversification opportunity, but I also take a pause since it’s sensitive to economic conditions. (And I wonder if it would be affected by self-driving trucks).

    Like you, I would reserve only a small position for Norfolk Southern in my portfolio.

    Cheers,
    Miguel

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