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Analyst Blog

Leading railroad company, Kansas City Southern (KSU - Analyst Report) announced a quarterly dividend hike of 30% to 28 cents from 21.5 cents. The increased dividend is payable on Apr 2, 2014, to stockholders of record on Mar 10.

The company has also declared a 25-cent dividend on its 4% preferred stock payable on Apr 1, to shareholders of record on Mar 10.

Historically, the company made dividend payments only on its preferred stock until 2012, when it initiated dividends on its common stock. On Apr 27, 2012, the company paid a dividend of 19.5 cents.

We believe the increase in dividend payment\ on the company’s common stock stems from its earnings growth and encouraging outlook for the rest of the year. In fourth quarter 2013, the company reported adjusted earnings of $1.03 per share, an increase of 12% from 92 cents in the year-ago quarter. Total revenue was $616 million, up 8% year over year. The growth was primarily attributed to solid revenue improvement in the Intermodal segment and Agriculture & Minerals.

Similar to other railroads such as CSX Corporation (CSX - Analyst Report), Union Pacific Corporation (UNP - Analyst Report) and Norfolk Southern Corp. (NSC - Analyst Report), Kansas City Southern has exercised a strong pricing discretion. This has led to average pricing gains of nearly 4–5% per annum, and subsequently a higher profit margin.

Apart from strong pricing fundamentals, we believe that expanded business volumes and effective cost-control measures remain the primary catalysts for the company’s growth. Additionally, improving cross-border traffic between the U.S. and Mexico and emerging business opportunities in the Mexican market supported by its cheap labor cost will boost the company’s bottom line.

Kansas City Southern holds a Zacks Rank #3 (Hold).

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