One of the leading and oldest freight railroads,
Kansas City Southern
) has increased its dividend by 10% to 21.5 cents per share on
its common stock. The increased dividend is payable on Apr 3, to
stockholders of record on Mar 11.
Moreover, the company also announced a dividend payment of 25
cents on its preferred stock. This dividend will be paid on Apr
2, to the preferred stockholders of record on Mar 11.
Historically, the company made dividend payments only on its
preferred stock until last year, when it initiated dividends on
its common stock. On Apr 27, 2012, the company paid a dividend
payment of 19.5 cents.
We believe the increase in dividend payments on the company's
common stock stems from its stellar earnings performance and
encouraging outlook for the rest of the current year. In fourth
quarter 2012, the company reported an earnings growth of 19.5%
from year-ago results driven by higher freight rates and volumes.
For the full year, the growth rate was 14.3% year over year.
Similar to the other railroads like
Union Pacific Corporation
Norfolk Southern Corp.
), Kansas City Southern has exercised a strong pricing
discretion. This has led to average pricing gains of nearly 4-5%
per annum, and a subsequent double-digit profit margin.
Apart from strong pricing fundamentals, we believe an improvement
in business volumes and effective cost-control measures remain
the primary catalysts for the company's growth. Additionally,
improving cross-border traffic between the U.S. and Mexico and
emerging business opportunities in the Mexican market supported
by its cheap labor cost will boost the company's bottom line.
Over the past year, Kansas City Southern has significantly
benefited from positive rail industry fundamentals supported by
truckload conversion to rail. Additionally, several cost control
initiatives have led to operating ratio improvement.
As a result, management expects to post consistent operating
ratio improvement, taking its U.S. operating ratio down to
approximately 78.0% over the next 3-5 years. Despite the ongoing
economic uncertainty, management is still committed to achieve
the same goals that include an operating ratio in the low 70s
over the long term.
CSX CORP (CSX): Free Stock Analysis Report
KANSAS CITY SOU (KSU): Free Stock Analysis
NORFOLK SOUTHRN (NSC): Free Stock Analysis
UNION PAC CORP (UNP): Free Stock Analysis
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However, the company faces significant competition from various
transportation providers including railroads along with motor
carriers that operate on similar routes across its service area
and, to a less significant extent, barges, ships and pipelines.
Further, increased railroad regulation, highly unionized labor
and softness in the economy that will affect business volumes may
impede growth in the future.
Kansas City Southern retains a Zacks Rank #3 (Hold).