The second portfolio building block that I’d like to go over is CSX, the Jacksonville, Florida based train transportation company that dominates much of America’s East Coast. I first bought 36 shares of CSX on 9/13/13, only to, as described in the previous post, have the bank force the sale of my entire portfolio in the process of buying my house. I re-initiated a position in CSX with 35 shares on 1/13/14. Since that time, CSX has been a successful investments, despite some recent weakness in the transport sector. Since I initiated my position, it has risen from $28.42 to today’s current price of $33.90. This represents a gain of 17.82%.
During that time, I have collected five dividend payments, and seen the quarterly payout raised significantly. When I (re) purchased my shares, the dividend sat at .15 cents per share, and it has since risen to .18 cents per share, a raise of 20% in approximately 18 months. Included in this calculus is the announced but as-yet undistributed raise of two cents, from .16 to .18 on the dividend payment that went ex-div on 5/27/15, and will be distributed next week, on 6/15/15.
I consider what we’ve seen recently to be spectacular dividend growth in such a short time frame, and I wouldn’t be the least bit surprised to see it continue for quite a long time, as the dividend yield still sits at just a projected 2.12%. Importantly, this yield would be slightly higher than its five year average yield, which is 2%. All in all, I have seen my quarterly dividend income from this emerging giant jump from $5.25 to $6.48 every three months, an increase of 23%.
Thesis and Outlook
Now that I’ve considered my specific performance with this stock, I’d like to go over a bit of why I like the industry in general, and what macro trends, positive and negative, I consider the industry and company to be experiencing, giving rise to my thesis.
Lately with CSX, the elephant in the room has been coal. Thanks to a variety of factors that are largely out of CSX’s control, coal shipment volumes continue to fall in the Unites States. Chief among these factors is the Obama administration’s rules for coal-fired power plants, which has made coal less competitive on price, just as many of the world’s energy majors such as Exxon (XOM) and Royal Dutch Shell (RDS.B) have made huge investments in an alternative they believe to have a brighter future- natural gas. This trend is only forecasted to continue, as CSX announced at the recent JPMorgan Aviation, Transportation, and Industrials conference that they expect at least a further 5% drop in volume this quarter, with the trend beginning to level off in the future.
Despite this glaring weakness in what has been a strength for CSX during most of the company’s existence, I expect it to be nothing but a speed bump in the future. This is because, as they say, railroad earnings are very much tied to larger domestic and world-wide GDP growth, and I am an optimist on this front. Sure, there are some scary spots around the globe, especially with the possibility of a property bubble in China, and to some extent, even after all these years, the possibility of “Grexit“, or the exit of Greece from the European Union, and the fallout that would entail.
Ultimately, though, I think those two things are not that likely to rear their ugly heads, and, if one or both were to occur, not very likely to be as catastrophic as we might imagine. Especially with the China real estate bubble, which I consider to be much more ominous than the possibility of Greece leaving the EU, I believe that the effects would not be felt nearly as strongly by the American economy as by those in Asia itself. Though we like to delude ourselves into believing that China’s economy dwarves that of the United States, it absolutely does not. Even when the United States saw its own, much larger, more internationally connected and important bubble burst, China continued to see GDP growth of 6+ percent the entire time. I suspect effects for the United States of a Chinese property bubble would be even more mild than what the Chinese experienced during the popping of America’s property bubble.
Because I view our two major headwinds as unlikely to rear their ugly heads, and unlikely to actually hurt the United States economy if they do, I consider the macro economic conditions in America to be basically stable, and therefore expect to see GDP growth of between 1.5%-4% until something major changes. This stable macro economic climate should augur well for rail shippers like CSX.
Next, I believe that CSX is a wonderful company that is being well run and has a durable economic advantage over its competitors in the trucking industry. Therefore, I believe there will be a long-term trend away from shipping by truck towards shipment by rail, especially for longer hauls.
As we all know, energy for transportation is not getting cheaper, and United States public infrastructure is continuing to deteriorate. Though crude oil prices have seen a dip in the second part of this year thanks to OPEC deciding to keep its oil production static in the face of oversupply, in the long run demand for oil will increase, as it always has, and the price of oil will increase, as it always has. Concurrently, oil is a finite resource, and as demand rises and supply diminishes, it is a fact of economic nature that its price will increase.
Along with inevitably higher gasoline prices is the fact that America’s public infrastructure is decaying at an alarming rate, with little hope for the large scale investment needed to update it. At the same time, with population growth, more and more passenger cars can be expected to hit America’s roads and highways. As we’ve all seen, the result of this is predictable- terrible traffic congestion that only seems to get worse year by year.
I believe these trends will continue to push shippers to use rail more, and bodes very well for CSX in the long run.
Lastly, CEO Michael J. Ward and the rest of the top brass have a history of driving increased efficencies and cost increases, enabling bottom line growth, even with less than favorable macro trends. This discipline in expenses can be seen in their total revenue vs. total expenses, which, according to Morningstar.com have been very strong. For instance, in 2010, CSX reported expenses of $12,163 (in millions) while earning $19,565 in total revenue. Last year, though, they reported expenses of $19,329, versus total revenue of $29,961.
This, to me, shows that the company is being much more efficient in how it earns its money, able to charge higher prices for services that are costing it less to operate. Evidence of this can be seen in CSX’s earnings per share, with the company netting more and more each year. In 2010, 2011, 2012, 2013 and 2014, CSX made $1.37, $1.67, $ 1.79, $1.83, and $1.93 respectively in earnings per share. This is the type of smooth earnings growth investors like to see. Importantly, all of this is taking place while coal, which used to be one of CSX’s most important components, has been in free-fall. Eventually, the bottom will stop falling out of coal, and CSX will remain a disciplined business that is able to charge more and more for similar services because of its quality and efficiency.
There you have it folks. CSX is a company that has been very good to me, giving me nearly 20% capital appreciation, and 23% dividend payout growth since I partnered with the company just 18 months ago. To me, that is a wonderful rate of return, which I would take over and over again.
The main impediment that the company faces, as investors are all-too-familiar with, is the continued drop of coal shipments in the United States and abroad, as less and less power plants use it as an energy source, and more turn to natural gas instead. However, coal will not continue dropping forever, it will find a level someday, and CSX has managed to stay profitable for the entire time one of its main business drivers of the past has been in free fall.
At the same time, the world’s macroeconomic climate is basically stable. The United States continues to climb out of the recession that occurred at the end of the last decade, and has seen GDP growth of around 2% for several years now. Job growth during the Obama administration has been better than at any point since the 1990’s. Median wages in the United States have finally begun to tick up after years of stagnation, hours worked are on the upswing, and the labor force participation rate is headed up. The two major headwinds facing the world economy, a Chinese real estate bubble and the possibility of “Grexit”, the exit of Greece from the European Union, will probably be much more painful locally than to the United States economy.
Lastly, CSX is a well-run company with a wide moat, able to raise prices while offering the same services at less cost to themselves. They have a wide moat that makes new entrances into their field nearly impossible, thanks to the cost of infrastructure, and structural trends, such as the move away from shipment by truck towards shipment by rail and high gasoline prices (eventually) continue to be in their favor.
Disclosure: Long CSX, RDS.B