In Warren Buffett's most recent letter to Berkshire Hathaway's (NYSE: BRK-B) stockholders he writes glowingly of his company's latest acquisition: the Burlington Northern Santa Fe railroad. Buffett touts rail's inherent advantage over its main competitor, trucking. Namely, freight transported by rail is three times more fuel efficient than by truck. With the cost of fuel becoming a major expense in almost every facet of business these days, it is worth taking a look at rail freight in a new light, not as a last century anachronism, but as an industry reborn.
The ability to move one ton of freight almost 500 miles while using just one gallon of fuel means more than fuel-cost savings. The more freight that is moved by train (and the less by truck) means reduced dependence on foreign oil, lower greenhouse gas emissions, less traffic gridlock, and lower highway construction and maintenance costs.
The major haulers
Today's heavy lifters in rail freight include CSX (NYSE: CSX), Canadian National (NYSE: CNI), Union Pacific (NYSE: UNP), Norfolk Southern (NYSE: NSC), and Kansas City Southern (NYSE: KSU). These five railroads operate on more than half of the almost 140,000 miles of rail roadway in the U.S. (Most of Canadian National's track is in Canada.) Here's how they compare:
|
Company |
Market Cap (billions) |
Yield |
Dividend |
Payout Ratio |
Net Profit Margin |
Free Cash Flow |
|---|---|---|---|---|---|---|
| CSX | $28.55 | 1.98% | 51.25% | 23% | 14.7% | $1,425 |
| Canadian National | $35.25 | 1.79% | 16.22% | 23% | 25.36% | $1,422 |
| Union Pacific | $50.59 | 1.92% | 18.83% | 24% | 16.39% | $4,105 |
| Norfolk Southern | $27.44 | 2.28% | 20.76% | 35% | 15.72% | $1,244 |
| Kansas City Southern | $6.17 | N/A | N/A | N/A | 9.92% | $209 |
Source: Google Finance, Motley Fool CAPS, and company statements.
All but Kansas City Southern pay a dividend. And of those that do, the yield is around 2%, with those dividends growing strongly over the last five years -- in the case of CSX, at a 51.25% rate! Canadian National's net profit margin stands out at 25.36%, noticeably higher than the rest. They all have a comfortable free cash flow cushion, with Union Pacific's jumping out of the crowd at $4.1 billion.
A recent phenomenon that is adding to the railroads' bottom lines -- as fellow Fool Aimee Duffy points out here -- is the increase in new cars being shipped by rail from the revitalized automobile industry.
Rail has a lot going for it as a freight hauler and as a long-term investment. The higher fuel prices go, the more attractive rail gets. Over the long haul, I can't see fuel costs coming down, environmental issues going away, or hard-pressed government budgets able to easily pay for more and more roads. However, I would like to see the railroads increase their dividend payout ratios a bit to make their yields even more attractive, as they certainly have the cash to do so.
Keep an eye on CSX, Canadian National Railway, Union Pacific, Norfolk Southern, and Kansas City Southern by adding them to your watchlist.
