Railroad stocks aren't the most glamorous of choices. Moving items from point A to point B is not supposed to be. In fact, it's something that most of us take for granted. That predictability, however, is why there's room for these stocks in every portfolio.
You can say the world has become smaller. And there's no question that airplanes and last-mile delivery play a significant role in the global economy. But there's still a significant role for railroads. To begin with, they can transport some things that other forms of transport cannot. Second, there will always be demand for rail freight.
And railroad stocks pay you to own them because of the dividend. Like utility stocks, many of these companies offer stable dividends which, in some cases have increased over time.
In this presentation, we're looking at seven railroad stocks that can help provide your portfolio with consistent income and a little growth when the economy is strong.
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- CSX Corp.
- Union Pacific
- Norfolk Southern
- Canadian Pacific
- Trinity Industries
- GATX Corp.
- Westinghouse Air Brake Technologies Corp.
#1 - CSX Corp. (NASDAQ:CSX)
Railroads are sensitive to macroeconomic pressures. So, one strategy for investing in railroad stocks is to buy companies that hold a leadership position. CSX Corp. (NASDAQ:CSX) has over 26,000 miles of track across 23 states, in addition to the District of Columbia and two Canadian provinces. The company operates primarily along the east coast and the southeastern United States. This makes CSX one of the two largest Class 1 railroads in the industry.
In 2021, CSX acquired a trucking division. Quality Carriers that specialize in the transportation of bulk liquid chemicals. This allows the company to provide comprehensive transportation services to customers.
In the first two quarters of 2022, CSX is posting a year-over-year increase in revenue and profits. This is despite the fact that the volume of coal they transport (which makes up 13% of revenue) has decreased significantly in the last decade.
CSX doesn’t pay the most robust dividend in the sector. It has, however, increased its dividend for each of the last 17 years and has a sustainable 22% payout ratio.
About CSX
CSX Corporation, together with its subsidiaries, provides rail-based freight transportation services. The company offers rail services; and transportation of intermodal containers and trailers, as well as other transportation services, such as rail-to-truck transfers and bulk commodity operations. It also transports chemicals, agricultural and food products, minerals, automotive, forest products, fertilizers, and metals and equipment; and coal, coke, and iron ore to electricity-generating power plants, steel manufacturers, and industrial plants, as well as exports coal to deep-water port facilities.
Read More - Current Price
- $31.85
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 12 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $38.78 (21.8% Upside)
#2 - Union Pacific (NYSE:UNP)
Next on our list of railroad stocks is Union Pacific (NYSE:UNP). The railroad is to the west coast, and CVX is to the east coast. That is, a dominant player. In this case, Union Pacific posted revenue of nearly $22 billion in 2021. And in the first two quarters of 2022, the company is on pace to beat that number.
One catalyst for this growth is the railroad’s shift to a precision scheduled railroading (PSR) system. The goal of a PSR system is to increase locomotive productivity. CVX has already largely moved to this system.
Union Pacific also pays an attractive dividend that currently pays out $5.20 per share annually. It’s also increased the dividend in each of the last 15 years. And for those that care about such things, UNP is a Warren Buffett stock.
About Union Pacific
Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, operates in the railroad business in the United States. The company offers transportation services for grain and grain products, fertilizers, food and refrigerated products, and coal and renewables to grain processors, animal feeders, ethanol producers, renewable biofuel producers, and other agricultural users; and construction products, industrial chemicals, plastics, forest products, specialized products, metals and ores, petroleum, liquid petroleum gases, soda ash, and sand, as well as finished automobiles, automotive parts, and merchandise in intermodal containers.
Read More - Current Price
- $226.32
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 12 Buy Ratings, 8 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $259.80 (14.8% Upside)
#3 - Norfolk Southern (NYSE:NSC)
Norfolk Southern (NYSE:NSC) is the third-largest railroad in the United States. The company operates over 19,000 route miles across 22 states and Washington D.C. The railroad has the most extensive intermodal network in the East and is a principal carrier of coal, automobiles, and automotive parts.
In its most recent quarter, Norfolk Southern posted revenue and earnings that were 16% and 5% higher, respectively, than in the same quarter the prior year. This was despite the company’s earnings coming in slightly below expectations.
Norfolk pays a dividend that currently pays out $4.96 on an annual basis. That’s more than twice the amount of other companies in the transportation sector. The company also has a sustainable 39% payout ratio.
As of September 2022, analysts have Norfolk Southern a consensus Hold rating with a price target of over $283 which represents a 23% upside from its current level.
About Norfolk Southern
Norfolk Southern Corporation, together with its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods in the United States. The company transports agriculture, forest, and consumer products comprising soybeans, wheat, corn, fertilizers, livestock and poultry feed, food products, food oils, flour, sweeteners, ethanol, lumber and wood products, pulp board and paper products, wood fibers, wood pulp, beverages, and canned goods; chemicals consist of sulfur and related chemicals, petroleum products comprising crude oil, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes, sand, and natural gas liquids; metals and construction materials, such as steel, aluminum products, machinery, scrap metals, cement, aggregates, minerals, clay, transportation equipment, and military-related products; and automotive, including finished motor vehicles and automotive parts, as well as coal.
Read More - Current Price
- $234.15
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 13 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $275.68 (17.7% Upside)
#4 - Canadian Pacific (NYSE:CP)
The next and last railroad stock on our list takes us north of the border. Canadian Pacific (NYSE:CP) is delivering steady revenue and earnings. But what caught my attention at this time is the company’s recently launched carbon emissions calculator. This will give its customers insight into the carbon footprint of the company’s freight rail transportation services.
Unless you have knowledge of the railroad system you may not be aware that it’s among the leaders in the transition to a clean energy economy. In many ways, transporting by rail is “cleaner” than transporting by other means.
With that in mind, this launch by Canadian Pacific may not be a moat they can maintain for very long, but for now it makes the stock attractive with revenue and earnings projected to increase by double digits in the next five years.
About Canadian Pacific Kansas City
Canadian Pacific Kansas City Limited, together with its subsidiaries, owns and operates a transcontinental freight railway in Canada, the United States, and Mexico. The company transports bulk commodities, including grain, coal, potash, fertilizers, and sulphur; merchandise freight, such as forest products, energy, chemicals and plastics, metals, minerals, consumer products, and automotive; and intermodal traffic comprising retail goods in overseas containers.
Read More - Current Price
- $72.26
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 10 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $93.25 (29.0% Upside)
#5 - Trinity Industries (NYSE:TRN)
The rest of the stocks on this list don’t operate railroads but influence rail traffic in other ways that make them worthy of inclusion on this list. The first stock is of Trinity Industries (NYSE:TRN). The company provides rail transportation products and services in North America. It also offers a platform of services that includes leasing, manufacturing, and maintenance.
If you bought TRN stock five years ago, you don’t have much growth to show for it. But that may be changing. Trinity Industries is expected to show strong revenue and earnings growth over the next five years. And right now, investors can buy the stock for around 13x earnings which makes it an attractive buy relative to the broader market. The company’s dividend is not impressive from a payout standpoint, but it has a yield of over 3% and has been increasing the dividend for 11 years.
About Trinity Industries
Trinity Industries, Inc provides rail transportation products and services under the TrinityRail name in North America. It operates in two segments, Railcar Leasing and Management Services Group, and Rail Products Group. The Railcar Leasing and Management Services Group segment leases freight and tank railcars; originates and manages railcar leases for third-party investors; and provides fleet maintenance and management services.
Read More - Current Price
- $35.76
- Consensus Rating
- Hold
- Ratings Breakdown
- 1 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $35.67 (0.3% Downside)
#6 - GATX Corp. (NYSE:GATX)
GATX Corp. (NYSE:GATX) leases tank and freight railcars along with locomotives for transporting petroleum, chemical, food/agriculture, and transportation industries in the United States and in select international markets.
GATX stock is up over 60% in the last five years. Not surprisingly, much of that growth has occurred since the onset of the pandemic. However, the company is still expected to show stock price growth over the next year. The consensus rating of analysts tracked by MarketBeat is for a stock price of $120.67, which would be a gain of over 21% from the current price.
GATX trades at over 19x earnings which is a slight premium to the S&P 500. However, it is expected to grow earnings by double digits over the next five years. And that’s with revenue only projected to increase in the low single digits. That’s an appealing combination that highlights the company’s attractive profit margin.
About GATX
GATX Corporation, together its subsidiaries, operates as railcar leasing company in the United States, Canada, Mexico, Europe, and India. It operates through three segments: Rail North America, Rail International, and Portfolio Management. The company leases tank and freight railcars, and locomotives for petroleum, chemical, food/agriculture, and transportation industries.
Read More - Current Price
- $154.52
- Consensus Rating
- Hold
- Ratings Breakdown
- 2 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $151.80 (1.8% Downside)
#7 - Westinghouse Air Brake Technologies Corp. (NYSE:WAB)
The last of the railroad stocks to look at is not a pure play stock but one that is critical to the railroad industry. Westinghouse Air Brake Technologies Corp. (NYSE:WAB) provides equipment and components for new and existing freight cars. In addition to railroads, the company does business in the mining, industrial, and marine sectors.
At first glance, the stock may not hold that much appeal. It’s only had stock price growth of about 10% in the last five years. However, the company’s recent earnings reports show strong year-over-year growth in revenue and earnings. The company attributes the growth, in part, to higher operating margins. That bodes well for continued growth into 2023.
That bullish sentiment is shared by analysts from Raymond James, who gave the stock an Outperform rating and a price target of $103. That is slightly above the consensus estimate of $99 per share.
About Westinghouse Air Brake Technologies
Westinghouse Air Brake Technologies Corporation, together with its subsidiaries, provides technology-based locomotives, equipment, systems, and services for the freight rail and passenger transit industries worldwide. It offers diesel-electric, battery, and liquid natural gas-powered locomotives; engines, electric motors, and propulsion systems; and marine and mining products.
Read More - Current Price
- $193.03
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 7 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $175.30 (9.2% Downside)
As you might guess, railroad stocks can be a cyclical industry. And during economic slowdowns, railroad stocks may struggle. However, due to the stability of their business model, there are opportunities available in the railroad sector.
The industry has also undergone consolidation over the last several decades. On the one hand that means that there are fewer railroad stocks to choose from. On the other hand, this consolidation has helped to smooth out some of the economic impact.
However, it's understandable if investors may not want to devote multiple slots in their portfolio to individual railroad stocks. This is where an exchange-traded fund (ETF) can be an appealing alternative. The iShares U.S. Transportation ETF (BATS:IYT) and the First Trust Nasdaq Transportation ETF (NASDAQ:FTXR) are two good options for investors looking for an ETF that provides exposure to the railroad sector. Like all ETFs, however, investors should remember that these ETFs are different from pure-play railroad stocks.
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