Sunday, May 10, 2009

Net Payout Yield: CSX

The railroad stocks like CSX (CSX) have been out of favor for awhile because of declining shipments. CSX though continues to maintain a 2.8% dividend while attractive, its not overwhelming in this environment where stocks move up or down by 20% sometimes in a day. We like to look at the Net Payout Yield as its been deemed more reliable in studies as a predictor of a stocks potential. View my old articles for more detail.

The stock buyback portion of the Net Payout Yield makes this stock more enticing. For 2008, CSX bought back $1.5B of net stock. For a company with a current market cap of $12.1B thats an impressive amount. Unfortunately for Q109, CSX didn't purchase any stock with the turmoil in the markets. That leaves the trailing 12 month buyback at $1.2B or 10% of the current market cap for a whopping yield of 10%. Combine that with the 2.8% dividend and the Net Payout Yield is an impressive 12.8%. Obviously CSX will need to get back to buying up stock for this yield to remain high.

Since we don't suggest investing blindly on this measurement, its always best to review the prospects of the company. Railroad shipments and revenues were down 17% YOY in Q1. Not too surprising considering the economy. The good news is that CSX still managed to earn $0.62 in the quarter so the quarterly dividend of $0.22 has very good coverage assuming the economy bottoms out. From a competitive position, we also like their position going forward as railroads tend to be cost effective compared to other forms of transportation and their isn't any new competition coming on board. Unlikely to see much in the way of new railroads especially in main shipping areas due to congestion and lack of space.

This all adds up to Stone Fox initiating a position in CSX. As the economy picks up so will the demand for CSX services and the additonal earnings will lead to higher dividends and more buybacks.

Long CSX in Net Payout and Hedged Growth Funds

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