Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Can Norfolk Southern Survive?

Norfolk Southern (NYSE: NSC) faces a struggle for survival even though it is a really good income investment.

The railroad is struggling with revenues that are in freefall in an increasingly difficult business environment. As recently as December 2014, Norfolk Southern reported revenues of $11.62 billion; that number fell to $11.17 billion in June 2015, $10.51 billion in December 2015 and $10.11 billion 2016.

Seeing that figure one has to wonder if NSC’s business is sustainable. Such doubts are increased by the railroad’s net income; which fell from $2 billion in December 2014 to $1.605 billion in June 2016. That is a loss of $395 million in income in 18 months which calls Norfolk Southern’s viability as an independent railroad into question.

It is easy to see why Norfolk Southern’s management pursued acquisition by the Canadian Pacific (NYSE: CP) earlier this year. There might not be enough business available to sustain it as an independent railroad.

Coal’s Death Slowly Killing Norfolk Southern

A major cause of Norfolk Southern’s woes is the slow agonizing death of American coal. Coal is one of the main products that Norfolk Southern hauls, its tracks connect ports like Norfolk with the coal country in Appalachia.


There were around 1,400 coal mines operating in the United States in 2008, 400 of them had closed by 2013, according to The International Business Times. Fewer mines means fewer coal cars on the rails.

U.S. exports of coal dropped by 65% between 2012, which cuts deeply into one of Norfolk Southern’s core businesses, Newsweek reported.  To make matters worse, coal-fired power plants; the major customer for the fuel, are shutting down as fast as Sears stores.

Around 94 coal-burning power plants shut down in 2015 and more closures are inevitable, the Morning Consult reported. The average coal-fired power plant in the United States was built in 1972, meaning most of them are slated for closure and replacement by cheaper natural gas in the near future.

Demand for coal for electricity production for coal in Ohio fell by 49% between 2007, and 2015, data from the Energy Information Agency (EIA) reported. That almost half of the market for a bulk commodity that Norfolk Southern hauls disappeared in just eight years. One other state; Pennsylvania saw a similar drop in demand for coal of 44%.

The writing is clearly on the wall for coal and a large percentage of Norfolk Southern’s bulk haulage business. Most experts think that there is little or nothing the next President can do to save the industry.

Is Norfolk Southern Doomed or a Good Investment?

Okay so Norfolk Southern’s future looks pretty bleak but is NSC a good investment? For the moment the answer to that question is yes.

Norfolk Southern investors received a dividend yield of 2.44% on October 7, 2016, and a return on equity of 13.18% on June 30, 2016. That makes this railroad a pretty good income stock.

Transportation 2007 rank: 90 Average pay: $45,000 to $50,000 Entry-level hiring: Up 9.4%, to 116, in 2007 3-year retention rate: 60% Diversity: 34% minority; 26% female Signing bonuses: 1% of entry-level hires received them in 2008.  Average: $1,000 Maximum 401(k) match: 3.5% Mentorship program participation: 100% Promoting From within: 71% of top execs have been with the organization 20+ years Full Profile Note: All data shown pertains to entry-level employees only

Investors received a dividend of 59¢ a share on August 4, 2016, which is pretty good. NSC has paid a dividend every quarter since November 2011 according to ycharts. So the payout is pretty reliable for you income investors.

The dividend was last raised in February 2015 when it rose from 57¢ to 59¢. A year earlier it rose from 54¢ to 57¢, and before that from 50¢ to 54¢ in 2013. It went from 47¢ to 50¢ in 2012 and 43¢ to 47¢ in 2011.

Dividend investors need to be concerned here because it looks as if NSC will not raise the dividend and possibly cut this year. That means this railroad might no longer be a reliable income investment. Its revenues are no longer sustaining the dividend.

 Is Norfolk Southern Making Money?

The most important question that income investors need to ask but often do not is, is a company making enough money to sustain the dividends. For the moment Norfolk is making enough money to sustain the dividends, but that might soon change.


Cash from operations at the railroad on June 30, 2016, $2.808 billion, was down from June 2015, $2.916. More worryingly the free cash flow was very low at $19 million and the carrier had only $866 million in cash and short-term investments available.

Like many railroads, Norfolk Southern is also asset rich and cash poor. It reported $34.33 billion in assets on June 30, 2016. That provided most of the enterprise value of $37.36billion reported on October 11, 2016.

These figures indicate that Norfolk Southern’s business, dividend and share price $94.38 on October 11, 2016 are simply unsustainable. My guess is that dividend cuts and a major drop in share value are inevitable at this railroad.

The most likely future for Norfolk Southern is absorption by a larger organization. Possibly a merger with a rival like Union Pacific (NYSE: UP) or acquisition by Berkshire Hathaway (NYSE: BRK.B).

NSC proves that railroads may no longer be a reliable value or income investment. Instead they are facing a struggle for survival in a changing world.