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Will Norfolk Southern Help You Retire Rich?

Wednesday - 4/3/2013, 9:38am  ET

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether Norfolk Southern makes a great retirement-oriented stock.

Norfolk Southern has benefited greatly from the rise of rail transportation, which in turn owes its recent success to high energy prices that boost the value of efficient fuel consumption compared to alternatives like trucking and air transport. Below, we'll revisit how Norfolk Southern does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Norfolk Southern.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$24 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

3 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

1.13

Fail

 

Worst loss in past five years no greater than 20%

(12.8%)

Pass

Valuation

Normalized P/E < 18

14.41

Pass

Dividends

Current yield > 2%

2.6%

Pass

 

5-year dividend growth > 10%

15.1%

Pass

 

Streak of dividend increases >= 10 years

11 years

Pass

 

Payout ratio < 75%

35.7%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Norfolk Southern last year, the company has dropped a point, as declining revenue over the past year cost it on its score. The stock has done fairly well, though, rising 15% over the past year.

Railroads have capitalized on the cost advantage their energy efficiency gives them. But geography has a lot to do with relative success, and Norfolk Southern and fellow eastern U.S. railroad CSX have had to deal with the unique challenge of seeing coal volumes decline substantially. By contrast, less coal-dependent railroads Union Pacific and Canadian National Railway haven't had to face that handicap, leaving them better able to capitalize on new trends. One big profit producer has come from transporting oil via rail from areas like the Bakken, where insufficient pipeline capacity exists to move energy products by more conventional means.

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