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Railroad Stocks Look Attractive at Current Prices

Contrary to the demise of coal usage, the railroad stocks are not dead yet.  The road and rail industry has trailed the S&P 500 in performance throughout 2012.  However, my analysis indicates that the rail stocks are undervalued and should be considered as a buy.  Last week, Goldman Sachs issued this report:

Goldman Sachs resumed coverage of the U.S. transportation sector with an attractive coverage view on railroads.   Canadian Pacific Railway (CP) was a top buy idea and made it to the conviction list. Goldman gave a buy rating to CSX Corp. (CSX) and Norfolk Southern Corp. (NSC).  The U.S. transportation industry still has room to raise rates further to recoup years of economic losses, said in a note.

I am in disagreement with Goldman on CP.  While CP is a good company, it is priced to high with a PE of 18 for a growth rate of 10%.  CP has a 5-year average PE of 14 which is comparable to the current industry average of 13.78.  If you like CP, wait for a pullback in price before entering.

My favorite rail stocks at this time are Norfolk Southern (NSC) and CSX Corp (CSX).  They both trade at a PE of around 12 which is lower than the industry average of 13.78.  NSC is trading at $72.25.  Medium-term trends in the majority of NSC’s markets remain favorable and support rising traffic, in our opinion. We see investments in its network improving capacity on heavily trafficked lanes like the Heartland and Crescent corridors, and leading to greater conversion of truck traffic over to rail.  Coal shipments will be down but the growth in other areas will overshadow its impact.  NSC has a 3-5 year projected growth rate of 13.8%.  NSC has a current dividend yield of 2.58% which compounds at 16.4% annually.  Looking forward 10 years, NSC will have a yield on cost of 11.9%.  NSC has an equity summary score of 9.0 out of 10 for a Bullish outlook.

CSX is trading at $21.89 with a one year price performance of -12.2%.  We believe CSX will benefit from economic recovery in the U.S., given its role in transporting many of the basic materials required in manufacturing and construction. We also think the recession forced a more intense focus on operating efficiencies, which should support wider margins during a period of rising volumes. CSX has a 3-5 year projected growth rate of 12.5%.  CSX has a current dividend yield of 2.50% which compounds at 15% annually.  Looking forward 10 years, CSX will have a yield on cost of 9.9%.  CSX has an equity summary score of 7.5 out of 10 for a Bullish outlook.

Union Pacific (UNP) is a little more expensive at a PE of 14 but it also has an EPS growth rate of 15%.  We believe UNP’s new traffic, especially shale-oil related, is coming on at higher prices than we had previously anticipated. On this, and slightly improved coal volumes, we are boosting our EPS estimate for ’12 by $0.24 to $8.19 and ’13’s by $0.22 to $9.02. We note that UNP posted Q2 EPS of $2.10, vs. $1.59, exceeding our estimate and the Capital IQ consensus, both of which were $1.96.  UNP is trading at $117.37 with a dividend yield of 2.01%.  Looking forward 10 years, UNP will have a yield on cost of 7.9%.  UNP has an equity summary score of 9.3 out of 10 for a VERY Bullish outlook.

Stocks with 30% Dividend Increases in Last Quarter

As the market uncertainty continues throughout 2012, investors are still seeking safety from income investments.  While a significant amount of money has moved into bonds, dividend stocks are still a great place to find income streams.  The boards of many companies are realizing this and responding by increasing their dividends.  You have many dividend growth companies that continue to increase their dividends at a high pace each year.  The following list includes companies that increased their dividend payments by 30% in the previous quarter.

Southwest Airlines (LUV) engages in the operation of a passenger airline that provides scheduled air transportation in the United States.  LUV increased its dividend from $0.045 to $0.10 for an increase of 122%.  LUV has a 5-year average dividend growth rate of 17.32%.  LUV has a dividend yield of 0.43% with a 5% payout ratio.  LUV is trading at $9.18 with a market cap of $7.12 billion.  LUV has an equity summary score of 7.1 out of 10 for a Bullish outlook.

KeyCorp (KEY) operates as a holding company for KeyBank National Association that provides various banking services in the United States.  KEY increased its dividend from $0.03 to $0.05 for an increase of 66%.  KEY is rebuilding its dividend since being cut in the financial crisis of 2008.  KEY has a dividend yield of 2.60% with a 13% payout ratio.  KEY is trading at $7.66 with a market cap of $7.34 billion.  KEY has an equity summary score of 4.4 out of 10 for a Neutral outlook.

Coach, Inc. (COH) designs and markets accessories and gifts for women and men in the United States and internationally.  It primarily offers handbags, women’s and men’s bag, accessories, business cases, footwear, wearables, jewelry, sunwear, travel bags, watches, and fragrance products.  COH increased its dividend from $0.225 to $0.30 for an increase of 33%.  COH has increased its dividend each year since initiating in 2009 for a total increase of 329%.  COH has a dividend yield of 2.08% with a 26% payout ratio.  COH is trading at $57.49 with a market cap of $16.5 billion.  COH has an equity summary score of 8.7 out of 10 for a Bullish outlook.

Barrick Gold Corporation (ABX) engages in the production and sale of gold and copper. The company has a portfolio of 26 operating mines, and exploration and development projects located in North America, South America, the Australia Pacific region, and Africa.  ABX is down 20% in the past year as the price of gold has declined.  ABX increased its dividend from $0.15 to $0.20 for an increase of 33%.  ABX has a 5-year average dividend growth rate of 21.7%.  ABX has a dividend yield of 2.17% with a 12% payout ratio.  ABX is trading at $36.36 with a market cap of $36.8 billion.  ABX has an equity summary score of 4.4 out of 10 for a Neutral outlook.

The Goldman Sachs Group, Inc. (GS) provides investment banking, securities, and investment management services, as well as a range of financial services to corporations, financial institutions, governments and high-net-worth individuals worldwide.  GS increased its dividend from $0.35 to $0.46 for an increase of 31.4%.  GS has a 5-year average dividend growth rate of 5.6%.  GS has a dividend yield of 1.93% with a 20% payout ratio.  GS is trading at $94.05 with a market cap of $46.96 billion.  GS has an equity summary score of 0.9 out of 10 for a VERY Bearish outlook.

Marriott International, Inc. (MAR) operates, franchises, and licenses hotels and corporate housing properties worldwide.  MAR increased its dividend from $0.10 to $0.13 for an increase of 30%.  MAR has a 5-year average dividend growth rate of 12%.  MAR has a dividend yield of 1.32% with a 68% payout ratio.  MAR is trading at $39.12 with a market cap of $13.0 billion.  MAR has an equity summary score of 8.5 out of 10 for a Bullish outlook.

UnitedHealth Group Incorporated (UNH) operates as a diversified health and well-being company in the United States.  UNH increased its dividend from $0.1625 to $0.2125 for an increase of 30.8%.  UNH has a 5-year average dividend growth rate of 95%.  UNH has a dividend yield of 1.52% with a 13% payout ratio.  UNH is trading at $55.70 with a market cap of $57.9 billion.  UNH has an equity summary score of 9.5 out of 10 for a VERY Bullish outlook.

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