Why You Should Retain Norfolk Southern (NSC) in Your Portfolio

Zacks Equity Research

March 23, 2023 at 11:15 AM·3 min read

Norfolk Southern Corporation’s NSC efforts to reward its shareholders through dividends and buybacks bode well.

Investors always prefer an income-generating stock. Hence, a dividend-paying one is obviously much coveted. However, headwinds like high fuel costs and supply-chain disruptions continue to hurt NSC. Currently, NSC carries a Zacks Rank #3 (Hold).

Factors Favoring NSC

Despite economic uncertainties, Norfolk Southern is committed to reward its shareholders. During 2022, Norfolk Southern paid dividends worth $1,167 million, up 13.5% year over year, and repurchased and retired common stock worth $3,110 million.

Norfolk Southern's strong free cash flow generating ability supports its shareholder-friendly activities. In January, the company's board announced a 9% increase in its quarterly dividend payout. This was the fourth dividend hike announced by the company in a year’s time.

Moreover, higher fuel surcharges and favorable pricing are driving the top line. Improvement in coal revenues represents a further tailwind. In fourth-quarter 2022, coal revenues increased 28% year over year to $448 million. Coal volumes increased 8% in the quarter.

Key Risks

NSC is being hurt by headwinds like supply-chain disruptions and slower network velocity, due to which overall volumes declined 1% year over year in fourth-quarter 2022. Volumes declined in each quarter of 2022, resulting in an annual decline of 3% from 2021 levels.

Moreover, high fuel costs are denting the bottom-line growth. At NSC, expenses on fuel surged 82.6% year over year in 2022, leading to a 18.5% rise in operating costs. High capex is also likely to play as a spoilsport.

Zacks Rank & Key Picks

Currently, NSC carries a Zacks Rank #3 (Hold). Some better-ranked stocks for investors interested in the Zacks Transportation sector are:

Alaska Air Group ALK, being aided by the improved air-travel-demand situation, reported better-than-expected fourth-quarter 2022 results. The company expects a 29-32% increase in the top line in first-quarter 2023.

ALK has been increasing its capacity to meet the upbeat demand. Capacity is expected to increase 11-14% in the first quarter of 2023.

The Zacks Consensus Estimate for Alaska Air's current-year earnings has been revised upward by 7.5% in the past 60 days. ALK currently has a Zacks Rank of 2 (Buy). You can see the complete list of today’s ZacksRank #1 (Strong Buy) stocks here.

United Airlines UAL, currently carrying a Zacks Rank of 2, is seeing steady recovery in domestic and leisure air-travel demand. On the back of upbeat air-travel demand, the stock was profitable in fourth-quarter 2022, which was the third consecutive profitable quarter at UAL.

Driven by solid demand, management expects total revenue per available seat mile to grow 22-23% year over year for the first quarter of 2023. Total revenues are anticipated to grow almost 51% year over year. The Zacks Consensus Estimate for current-year earnings has been revised upward by 7.9% in the past 60 days.

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