Income investors seek a steady stream of dividends. Norfolk Southern’s dividend history is long and it might make a great addition to an income portfolio. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
Norfolk Southern Corporation (NYSE: NSC) is one of the nation’s premier transportation companies. Norfolk Southern operates over 21,000 miles of railroad in 22 states. Based out of Norfolk Virginia, the $48 billion business raked in $11 billion in sales last year.
The company runs within the industrial sector and maintains a solid credit rating (BBB+) from the S&P. This allows Norfolk Southern to issue cheap debt to expand operations, and pay dividends.
Norfolk Southern has payed dividends for 146 consecutive quarters. This quarter will be no different as the company announced a dividend increase from $0.80 to $0.86 per share. The dividend hike was announced on January 23 and will be payable March 11 to shareholders of record on February 4.
10-Year Norfolk Dividend History
Norfolk Southern paid investors $1.36 per share a decade ago. Over the last 10 years, the dividend has climbed to $3.04. That’s a 124% increase and you can see the annual changes below…
The compound annual growth is 8.4% over 10 years… but over the last year, the dividend climbed 24.6%. That increase in dividend growth is a good sign for investors. Norfolk Southern might work out as a great income investment. Let’s take a look at the yield…
Current Dividend Yield vs. 10-Year Average
Norfolk Southern’s long and steady history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and we’ll look at that soon.
The dividend yield comes in at 1.91% and that’s below the 10-year average of 2.8%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. More often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that for every $1 Norfolk Southern earns, it pays investors $0.60.
The payout ratio is a good sign of dividend safety… but accountants manipulate reported income. They adjust for goodwill and other non-cash items, which makes free cash flow a better metric.
Here’s Norfolk Southern payout ratio based on free cash flow over the last 10 years…
The ratio is volatile over the last 10 years and the trend is down. The last reported year shows a payout ratio of 47.6%. That gives Norfolk Southern a comfortable margin to pay raise dividends in the future. Norfolk Southern has a steady history of paying dividends and this makes the company a good bet for income investors.
If you’re curious about how you can increase your returns, our dividend reinvestment calculator can help you. Simply input the information about a dividend paying stock, and then click “calculate” to see what your investment will be worth in a set number of years.
Good investing,
Robert
