Norfolk Southern Stock Dividend Growth Appears To Be On Hold
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 exposed to the ups and downs of economic cycles. They are not your typical dividend stock favorites. But Norfolk Southern (NYSE: NSC) is one I like and have owned for many years.
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Norfolk Southern Stock Dividend Review
Is it time to buy stock in NSC? Let’s dig into this premier transportation company to find out.
Certainly, I will have some thoughts on the Norfolk Southern stock dividend. Including dividend growth metrics, and a view on dividend safety. This is all good information to know when you are trying to be smart about your money management decisions.
Are you interested in investing in transportation companies? Then, be sure to check out: UPS dividend stock analysis. This elite logistics and transport company is benefiting from the surge in e-commerce.
Or check out dozens of other dividend stocks and dividend investing articles. They are summarized on the dividends resources page. For your convenience.
Norfolk Southern Company Background
NSC operates approximately 19,500 miles of railroad. They do so in 22 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.
NSC Strategic Plan
To grow, Norfolk Southern looks to improve shipping volumes in 3 main areas:
- Intermodal (train to truck and truck to train)
The approximate share that each area contributes to total revenues is shown in the pie chart below:
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.
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 $3.76 per share.
Norfolk Southern Stock Dividend Yield
The annual dividend represents a 1.6% Norfolk Southern dividend yield. At the recent Norfolk Southern stock price.
Stock dividend yields 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 94 cents per share.
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 Monday.
Norfolk Southern Ex-Dividend Date
To receive the next NSC dividend payment, you must complete your purchase by 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 the month.
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.
Through 2019, Norfolk Southern had increased its annual dividend for only 3 consecutive years. 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 NSC dividend would have been increased for 18 consecutive years.
But, it looks like dividend growth has been delayed again. Likely due to economic contraction caused by the unprecedented events of 2020.
But this erratic 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
|1 Year||3 Years||5 Years||7 Years|
As shown in the chart above, dividend growth has been very strong in recent years. This comes mainly on the strength of the 2018 and 2019 dividend increases.
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 33% of accounting earnings.
I last saw this policy statement in the company’s 2019 investor day presentation. I searched for more recent updates to the policy. And, confirmation that this is still NSC’s goal. But, was unable to find anything to confirm or deny.
Norfolk Southern is an economically sensitive company. It has large capital investment requirements.
Therefore, a lower dividend payout ratio is justified while still rewarding shareholders with consistent dividends. And a 33% target payout ratio looks good to me.
Norfolk Southern Revenue Trend
Revenue has held in a fairly tight range over the past several years.
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.
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 above. No wonder Norfolk Southern Management was been comfortable with multiple dividend increases in those years!
I like fast dividend growth. But only if it is supported by earnings and cash flow.
These dynamics have led to a dividend payout ratio of about 35% 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 very close to the dividend policy Norfolk Southern management has set for itself.
First of all, 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 prudent 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 our dividends are paid.
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 have had a clear and negative impact on Norfolk Southern’s business activity. Revenue and earnings will likely decline from 2019.
But, being a company with good cash management practices, free cash flow appears to be holding steady. Even so, I doubt we see a dividend increase in 2020.
2021 is when I expected dividend growth to resume. 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 the 2020 recession to continue. For dividend growth to be put on hold for a while longer.
I don’t expect any of that to happen. I see increasing dividends resuming in 2021. So, 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.
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 who hold their own during a recession.
A corporation’s credit rating is similar to how your credit score works. Higher ratings mean lower risk to those who lend the company money. Furthermore, higher ratings mean lenders will be more likely to get their loans paid back.
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. Investment-grade is what most consistent dividend-paying companies are rated.
Norfolk Southern Debt To Equity Ratio
Norfolk Southern’s debt to equity ratio checks in at .85 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
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 some different factors to make my 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.
- Current annual dividend payment – $3.76
- Projected dividend growth – 6.5%
- My desired annual return on investment – 9%
Using these assumptions, the dividend discount model calculates the fair value of NSC stock at $160 per share.
Morningstar Fair Value
The investment analysis firm, Morningstar, believes Norfolk Southern stock is fairly valued at $179 per share.
NSC Stock Price To Earnings Ratio
The NSC stock price to 2019 earnings sits at about 23 times. With an earnings decline likely for 2020, the forward NSC stock price to earnings ratio will only be higher.
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 – $160 per share
- Morningstar Fair Value – $179 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 – Summary
NSC is a well-run company with a long history. It has large barriers to entry that protect its long-term viability. However, the company is susceptible to the shorter-term ups and downs of economic cycles.
The Norfolk Southern dividend looks safe and well covered based on earnings and cash flow.
Until 2020, 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 it appears dividend growth has temporarily been put on hold. Due to 2020’s drop off in economic activity.
NSC represents a relatively smaller size position in my dividend stock portfolio. The stock is 1 of many solid investment options.
So, I intend to hold for the long term. And I would like to add to my position. But only at a price below $185 per share.
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