Here's Why Investors Should Hold Norfolk Southern (NSC) Now

Norfolk Southern Corporation NSC is benefiting from shareholder-friendly measures. However, weak freight conditions are headwinds.

Let’s delve deeper.

Factors Working in Favor of NSC

We are impressed by Norfolk Southern’s efforts to reward its shareholders through dividends and buybacks.   In the first nine months of 2023, the company returned $1,423 million to shareholders through a combination of dividends ($920 million) and share buybacks ($503 million).  

In January 2023, the company's board announced a 9% increase in its quarterly dividend payout. This was the fourth dividend hike announced by NSC in a year’s time. During 2022, Norfolk Southern paid dividends worth $1,167 million, up 13.5% year over year. It repurchased and retired common stock worth $3,110 million in 2022.

Norfolk Southern's strong free cash flow generating ability supports its shareholder-friendly activities. In 2022, free cash flow was $2,274 million. In the first nine months of 2023, free cash flow was $1,010 million.

The company’s position with respect to liquidity is good. It exited third-quarter 2023 with a current ratio (a measure of liquidity) of 1.08, higher than 0.76 at the end of the second quarter. The improvement in current ratio is a welcome development as it implies that the company has enough cash to meet its short-term obligations.

Factors Ailing NSC

Norfolk Southern is being hurt by weak freight conditions. The top line has been suffering due to below-par performances of all three key segments, namely, Merchandise, Intermodal and Coal.

Revenues are likely to be weak throughout 2023. Management expects revenues for 2023 to be down at least 4% in 2023.

Softness in overall volumes due to headwinds like weak freight conditions, supply-chain woes and slower network velocity are hurting the top line. We expect 2023 volumes to decline 1.4% from 2022's actuals.

Zacks Rank & Key Picks

NSC currently carries a Zacks Rank #3 (Hold).

Investors interested in the Zacks Transportation sector may consider better-ranked stocks like Ryanair Holdings RYAAY and SkyWest SKYW, each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

RYAAY is benefiting from buoyant air-traffic scenario post Covid. Traffic grew 11% to 105.4 million during the first half of fiscal 2024. On the back of robust traffic scenario, RYAAY’s profit after tax was €2.18 billion during the first half of fiscal 2024, up 59% year over year. Ryanair expects fiscal 2024 traffic to be 183.5 million.

SKYW's fleet modernization efforts are commendable. Initiatives to reward its shareholders also bode well. The Zacks Consensus Estimate for 2024 earnings increased 3.5% in the past 60 days.

 

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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