Fuel has always been a major cost for transportation companies like major railroad CSX (NASDAQ:CSX), and swings in fuel expenses can have a huge impact on profitability. In advance of Tuesday afternoon's first-quarter financial report, CSX shareholders expected to see some positive signs from the persistent drop in diesel prices, and many of them probably hoped that CSX would continue its string of dividend increases, which have come like clockwork every spring for years. Yet even optimistic investors got more than they bargained for from today's report, as CSX announced a big dividend boost and expectations-beating numbers on the top and bottom lines. Let's look more closely at the latest from CSX and what investors can expect for the rest of the year.
CSX keeps moving forward
The impact of the price of fuel was clear from CSX's results, as profits rose sharply despite relatively flat revenue figures. Sales of $3.03 billion were up about half a percent from the year-ago quarter, as strong demand in its core markets and better pricing power overcame the strong U.S. dollar even CSX collected less in fuel-recovery payments from customers. Despite the sluggish sales performance, CSX's profit soared 11% to $42 million, with earnings of $0.45 per share coming in above expectations. Operating ratios fell by 3.3 percentage points to 72.2%, as cost-saving initiatives combined with lower fuel costs to make the railroad more efficient.
CSX's various segments showed relatively flat performance across the railroad. Merchandise volumes rose by 2%, while intermodal volume climbed 1% and coal dropped 1%. From a revenue standpoint, only the merchandise segment showed gains, with growth in transport of minerals as well as waste and equipment overcoming declines in metals and automotive shipping.
On the expense front, labor costs rose 8%, with inflation playing a key component of the increase along with a rise in employee counts. But materials costs were flat, and fuel savings of $176 million represented a 41% drop from year-ago levels. All told, expenses fell by 4% to $2.18 billion, leading to operating income gains of 14%.
CSX still hasn't solved all of its operational issues. On-time origination figures dropped 13 percentage points to 50%, while on-time arrivals came in at 41%, down 10 percentage points. Train velocities appear to be bottoming out near 20 miles per hour, but dwell time lengthened by almost an hour to 27.7 hours, reflecting the ongoing traffic struggles CSX and its peers have faced. Nevertheless, accident and injury rates were down substantially from early 2014, reflecting CSX's ongoing efforts to promote safety.
CSX investors get their payoff
In response to the strong results, CSX returned more capital to shareholders in a couple ways. First, it boosted its quarterly dividend to $0.18 per share, a 13% rise from its previous dividend rate. Also, CSX committed another $2 billion toward a new share repurchase program, replacing the old $1 billion program and giving the stock further support over the next two years.
CEO Michael Ward explained some of the thought process behind the capital moves. "CSX's core earnings remain strong, and we are continuing our drive to provide excellent service for our customers and value for our shareholders," Ward said. "Our commitment and confidence in CSX's future is underscored by the positive shareholder actions we're taking today."
Yet to keep improving, CSX will have to make good on its longer-term initiatives. Port disruptions on the West Coast resulted in lower volume of international intermodal shipments, but the highway-to-rail conversion program in the U.S. has helped lift domestic intermodal volume to compensate. Similarly, even as cheap energy brings fuel savings, CSX has also seen declines in shipments of fracking sand as production companies scale back on their efforts to drill more wells. Nevertheless, CSX has been disciplined in its pricing approach, having seen all-in same-customer pricing climb 1.6%, with even strong 3.4% gains for its merchandise and intermodal customer base.
CSX shareholders were generally pleased with the performance, sending shares higher by 2.5% in the first 45 minutes of after-hours trading following the announcement. In the long run, CSX could easily build on its gains as long as it can make the most of cheap fuel prices as long as they last.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.