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

·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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