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Invest in railway stocks

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Railroad stocks were responsible for one of the first great investment booms in US history. More than a century later, the railroads are still an important part of the economy.

Over the years, the industry has been centered around a handful of large corporations responsible for transporting the majority of goods to and from ports. As shippers and truck drivers have faced disruption during the COVID-19 pandemic, the railroads have done better due to their unique 24/7 business model and ability to move a high volume of merchandise with very few people supported than most. And at a time when fuel efficiency is increasingly important, rail is gaining ground as the preferred mode of transportation.

Transportation stocks tend to be cyclical, but railroads hold up better than most in an economic downturn because rail companies are larger and better capitalized than trucking companies. Even though high oil prices result in higher fuel costs, railroads generally do well when fuel costs are through the roof because trains can carry much more cargo than trucks for every gallon of diesel they use. .

For much of the 20th century, the rail industry was plagued by bankruptcies. But thanks to years of consolidation and a new initiative called Precision Scheduled Railroading, the businesses that remain can now get more out of their assets than ever before. The changes have lowered costs across the industry and allowed companies to return more cash to shareholders.

5 rail stocks to watch

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market cap

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Pacific Union (NYSE:MA67Q7)

$165.68 billion

The only publicly traded railroad operating primarily west of the Mississippi River, serving West Coast ports.

canadian national (NASDAQ:897879)

$88.36 billion

Privatized in 1995, Canada’s largest rail company has tracks stretching from the Atlantic to the Pacific and through the US Midwest to the Gulf of Mexico.

CSX (NASDAQ:865857)

$76.39 billion

As one of two major US rail companies serving the East Coast, the company connects 23 states and two Canadian provinces.

Canadian Pacific (NASDAQ:798292)

$72.5 billion

This Canadian railway company is in the process of merging with Kansas City Southern.

south norfolk (NASDAQ:867028)

$64.6 billion

Norfolk Southern, the other US East Coast railroad, has historically been a major carrier of coal, manufactured goods, and automobiles.

DATA SOURCE: YAHOO! FINANCE. DATA AS OF MARCH 15, 2022

Pacific Union

Union Pacific is one of the two major railroad companies operating in the western half of the United States, with tracks connecting the ports of Los Angeles and Long Beach to major US cities. Union Pacific has long had a reputation among investors as the best-run railroad company in the United States. Over the past decade, the company has invested more than $35 billion to modernize and maintain its 32,200 miles of track.

Like most railroads, Union Pacific pays a dividend of about 1.8% at the time of this writing. Over the last five years, the rail company has increased its revenue by 2.1% annually and forecasts continued growth and a dividend equal to 45% of annual earnings.

canadian national

Canadian National has only been publicly traded since the mid-1990s, but the government entity turned private company provides access to nearly every corner of Canada and also provides shipping services to the Gulf of Mexico. The railroad has more than 22,000 miles of line and transports agricultural products, energy and containers from coast to coast.

Canadian National is under new management after a dispute over voting rights in 2021, but still pays a dividend of around 1.8%. The company believes it can return to the 3.3% compound annual growth rate that the railway has achieved over the past five years, thanks to improved track, strong demand for Canadian power sources and the impact of space. combined North American trade.

CSX

CSX operates primarily east of the Mississippi River with more than 20,000 miles of track and access to 70 ports. Historically, East Coast railways have been less efficient than their Canadian and Western counterparts due to increased traffic, but CSX has made great strides in improving its operations in recent years. Over the last five years, CSX has achieved annual growth of more than 15%.

Officially, CSX has only been around since 1980, but the company is a merger of several railroads that have been around since the early days of the railroad age, including Baltimore and Ohio. The company faces the challenge of maintaining and upgrading many of the century-old assets along the rails, but it still produces reliable earnings and a dividend that currently yields more than 1.1%.

Canadian Pacific

Canadian Pacific has long been the smaller of Canada’s two major railways, with only 14,700 miles of track and less coverage in the United States. That will change when the proposed acquisition of Kansas City South (NASDAQ:AAPL) will be approved by regulators in late 2022. The acquisition would give Canadian Pacific an extensive network of routes along the North American coast to a deepwater port in Mexico, which, combined with Canada’s existing east-west routes, it would allow seamless freight movement across the continent.

Rail mergers have had a long history of spiraling out of control, and investors should be cautious during the likely multi-year integration process (assuming the deal goes through). However, those already invested can still enjoy a dividend that currently yields 1.3% and hope that they will be part of the birth of a new North American transportation company.

south norfolk

Norfolk Southern is the other Eastern-focused railroad, operating more than 19,300 miles of track in 22 states and the District of Columbia. The company is a major transporter of industrial, agricultural and consumer goods and a major supplier of coal and auto parts. Norfolk Southern also has an extensive intermodal network in the East that moves containers from ship hulls to truck beds.

Norfolk Southern’s revenue has grown 12% annually for the past five years and its dividend is currently over 1.7%. The company increased its dividend twice in 2021 and also doubled its share buyback target. Over the next several years, Norfolk Southern plans to return 35% to 40% of its net income to shareholders in the form of ongoing dividends.

Another “railway company” is much more than a railway company

There is another railroad that competes with the Union Pacific in the west, but it is in the vast portfolio of Berkshire Hathaway (NYSE:WKN) (NYSE:WKN) hidden. In 2009, Berkshire Hathaway purchased full control of Burlington Northern Santa Fe, owner of the largest rail company in North America. BNSF, as the rail company is known, operates more than 32,500 miles of track in 28 states and three Canadian provinces.

BNSF’s profits are only a small part of Berkshire Hathaway’s total profits, and it would be unwise to buy Berkshire just for its railroad. But for investors looking for diversified exposure to the rail sector, Berkshire Hathaway could be an attractive investment.

Is Rail Stock Right For You?

Rail transport can be a hassle, but it delivers. In a world where the supply chain is under pressure and fuel efficiency is key, the railway, with its 24/7 operating model and ability to haul hundreds of rail cars with a single locomotive, is well positioned to deliver in the coming years to take a growing share of the transport pie.

These rail companies offer a steady stream of income, reliable cash flows, and moderate but sustainable revenue growth. For those looking to hold a growth-oriented portfolio when technology stocks are not in demand, rail stocks can be an attractive diversification option.

The article Investing in Rail Stocks first appeared in The Motley Fool Germany.

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This article was written by Lou Whiteman and was published on Fool.com on 03/22/2022. It has been translated so that our German readers can join the discussion.

The Motley Fool owns shares and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Canadian National Railway and Union Pacific and recommends the following options: January 2023 $200 Berkshire Hathaway long calls (B shares), January 2023 $200 Berkshire Hathaway short calls (B shares) and short calls $265 January 2023 Berkshire Hathaway (B shares) Berkshire Hathaway (B shares)

Motley Fool Germany 2022

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