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Norfolk Southern's (NSC) Dividends a Savior, Volume Woes Sting

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Norfolk Southern’s NSC efforts to reward its shareholders through dividends and buybacks attest its financial strength. However, headwinds like supply-chain disruptions and slower network velocity are hurting its overall volumes. Currently, NSC carries a Zacks Rank #3 (Hold).

Let’s delve deeper to unearth the tailwinds and headwinds confronting NSC.

Despite coronavirus-related woes, Norfolk Southern is committed to rewarding its shareholders.  In 2020, NSC returned $2,399 million to its shareholders through a combination of dividends ($960 million) and share buybacks ($1,439 million).  In 2021, shareholders’ funds were returned to the tune of $4,418 million through dividends ($1,028 million) and share repurchases (3,390 million). During the first quarter of 2022, NSC paid out dividends worth $297 million, up 19.3% year over year. NSC repurchased and retired common stock worth $600 million in the March quarter compared with $591 million a year ago.

Norfolk Southern's strong free cash flow generating ability supports its shareholder-friendly activities. NSC hiked its quarterly dividend thrice in a year. The latest dividend hike came in January 2022 when the company's board announced a 14% increase in its quarterly dividend payout to $1.24 per share. NSC expects current-year dividend payout ratio in the 35-40% range. Management expects to utilize the remaining cash flow and financial leverage to repurchase shares.

Driven by the intermodal and merchandise segments, management expects total revenues for 2022 to rise in the upper single digit (in percentage terms) from the 2021 levels. Boosted by revenue growth, the operating ratio (operating expenses as a percentage of revenues) is likely to increase in the 50-100 basis points’ range during 2022 from the 2021 reported figure.

However, higher fuel costs due to the spike in oil price are limiting bottom-line growth. In 2021, fuel expenses increased 49% year over year to $799 million. Moreover, the oil price shot up substantially following Russia's invasion of Ukraine. In the January-March period, oil price surged 33%. Hefty capex is also likely to be a spoilsport. In the March quarter, fuel expenses soared 70%. Expenses on this front are likely to be high in the June quarter as well, thereby restricting bottom-line growth.

Moreover, a contraction in overall volumes represents a major headwind. The metricdeclined 5% year over year in the first quarter of 2022. At the Wolfe Research Conference on May 24, management stated that the second quarter's overall volumes have slid 3% quarter to date. This downside was mainly due to a 10% decrease in coal volumes. Volumes in the metals and construction sub-group were down 6%. Intermodal volumes fell 4%. Mainly, due to volume woes, Norfolk Southern’ shares have lost 19% year to date.

Stocks to Consider

Some better-ranked stocks within the broader Transportation sector are as follows:

Golar LNG Limited GLNG currently flaunts a Zacks Rank #1 (Strong Buy). GLNG has a decent surprise history, as its earnings outperformed the Zacks Consensus Estimate in three of the preceding four quarters and missed the mark once, the average surprise being 42.1%. You can see the complete list of today's Zacks #1 Rank stocks here.

Shares of Golar LNG have rallied more than 100% in a year. Strong LNG market boosted the stock.  The staggering inflation flared up the oil and natural gas prices. Moreover, amid the Russia-Ukraine war, Europe is likely to look for gas supplies outside Russia. This is expected to drive demand for the LNG vessels, which bodes well for GLNG.

Star Bulk Carriers SBLK sports a Zacks Rank of 1 at present. SBLK's earnings surpassed the Zacks Consensus Estimate in three of the preceding four quarters and missed the mark once, the average surprise being 7.1%.

Shares of Star Bulk have gained more than 96% in a year. Improvement in economic activities is aiding the SBLK stock.


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Norfolk Southern Corporation (NSC) : Free Stock Analysis Report
 
Star Bulk Carriers Corp. (SBLK) : Free Stock Analysis Report
 
Golar LNG Limited (GLNG) : Free Stock Analysis Report
 
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