Why Norfolk Southern’s Share Repurchases Could Fall in 2016

Norfolk Southern's 4Q15 EPS Beat Analysts' Estimates

(Continued from Prior Part)

Shareholders’ earnings

In this article, we will review the share repurchases program of Norfolk Southern (NSC). The stock price is a function of revenue growth. Since January 1, 2016, NSC’s stock price has fallen by 35.4%, while NSC has consistently engaged in buybacks and dividends. In fact, it has paid dividends since its inception in 1982.

Norfolk Southern’s share repurchases

In 2015, Norfolk Southern’s (NSC) share repurchases totaled 11.3 million amounting to $1.1 billion. The buyback program will end on December 31, 2017. The above graph shows that beginning in 1Q15, the stock buyback by NSC fell on a sequential basis. During the fourth quarter, the company repurchased $78 million in shares. This could be due to the visibility of lower cash inflows in subsequent years.

NSC intends to repurchase shares through cash on hand, cash from operations, and debt. It has guided to repurchase shares of $200 million per quarter in 2016. NSC’s operating cash flows in 2015 were slightly up at $2.8 billion.

Free cash flows

Free cash flows are derived by deducting capital expenditures from operating cash flows. Norfolk Southern has a total free cash flow of $500 million in 2015. This was mainly due to productivity gains, network realignment, and cost-cutting exercises undertaken by NSC. The company had $1.1 billion in cash on December 31, 2015.

The company intends to rationalize secondary line network by 1,000 miles in 2016. It will result in savings in the form of reduced maintenance and lower capital spending in the long run.

Dividends

Norfolk Southern (NSC) paid a dividend of $713 million in 2015. NSC targets a dividend payout ratio of 33% in the next five years. The company’s average dividend payout was 40% during the last five quarters. We’ll compare NSC’s dividend yield of 3.35% with the peer group.

• CSX Corporation (CSX): 3.13%

• Union Pacific (UNP): 3.06%

• Kansas City Southern (KSU): 1.86%

• Canadian Pacific (CP): 0.83%

• Canadian National (CNI): 1.96%

The Industrial Select Sector SPDR ETF (XLI) holds 1.44% in Norfolk Southern (NSC). XLI holds 7.24% in the peer group.

Continue reading to learn more about cost-cutting initiatives taken by Norfolk Southern.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Key Takeaways from Norfolk Southern’s 4Q15 Earnings

• Part 2 - Norfolk Southern’s 4Q15 Revenues Missed Wall Street Estimates

• Part 3 - Norfolk Southern’s 4Q15 Coal Revenues Met Expectations, Dipped 20%