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Norfolk Southern Up 20% in First 9 Months of 2019: Here's Why

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Despite sluggish rail traffic volumes due to slowdown in global trade on account of the Sino–U.S. trade tensions and inclement weather in the United States, shares of Norfolk Southern Corporation (NSC - Free Report) outperformed its industry in the first nine months of 2019. Norfolk Southern has gained 20.1% compared with the industry’s 18.4% rally.


Factors Driving Growth

In order to improve productivity, Norfolk Southern is making constant efforts to streamline its operations. In line with its efforts to improve efficiencies, the company’s operating ratio (operating expenses as a percentage of revenues) in the first half of 2019 improved to 64.8% from 66.9% a year ago. Notably, lower the value of the metric the better. For 2019, it predicts operating ratio to improve at least 100 basis points compared with 65.4% achieved in 2018. Additionally, the company aims for a full-year operating ratio of 60% by 2021.

Furthermore, Norfolk Southern's new precision scheduled railroading operating plan, TOP21, aims to improve efficiency and customer service.  The first phase of the program, which has been recently implemented, already resulted in multiple benefits. Following the implementation, the network efficiency of the Merchandise unit has improved impressively owing to reduced circuity, train miles and train start.

We are also impressed by the company’s focus on rewarding its shareholders through share repurchases and dividends. Last year, Norfolk Southern returned more than $3.6 billion through dividends ($844 million) and buybacks ($2,781 million). Moreover, it generated free cash flow worth $1.8 billion in 2018.

Continuing the trend, in the first half of 2019, the company returned $1.5 billion to its shareholders through dividends ($458 million) and buybacks ($1,050 million), reflecting a 36% year-over-year increase. Notably, Norfolk Southern has increased its quarterly dividend payout four times since the commencement of 2018. Free cash flow of $973 million was generated in the period. Robust free cash flow generation by the company supports the possibility of a dividend hike going forward.

Apart from Norfolk Southern, railroad operators like Union Pacific Corporation (UNP - Free Report) , CSX Corporation (CSX - Free Report) and Canadian Pacific Railway Limited (CP - Free Report) increased their respective dividend payouts this year.

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