Investing in railroads is more than just a strategy for playing Monopoly. It is also a way to diversify your portfolio.
Railroad stocks include passenger train services as well as companies that provide freight transportation. There are also rail services stocks; they are involved with maintaining railroad tracks and switching lines.
Below we jump on board the choo-choo investment train to figure out what are the best railroad stocks to buy now.
Pros and Cons of Buying Railroad Stocks
The first thing you need to know about railroad stock investment is that the success of these companies is tied to the demand for cargo and the factors that influence the cost of cargo.
For instance, when the price of oil goes up, using airlines for freight transportation becomes less attractive.
Trains use less oil than airplanes so some companies will turn to railroad freight transportation as a way to reduce the cost of moving goods.
Freight transportation is also important for emerging economies as well as robust ones. The goods these people are buying are transported by trains. Jim Cramer calls railroad stocks “a proxy for commerce.”
Trucking companies and maritime shipping firms also tend to see a boost under these circumstances for similar reasons, but railroad stocks are unique because they are faster and more efficient than these other shipping options.
For each gallon of diesel, a train can move one ton of goods some 470 miles – that is the work of 280 trains. It is better for the environment. Railroad stocks also frequently offer dividends.
Is Union Pacific Stock a Buy?
Union Pacific [NYSE: UNP] operates in the western two-thirds of the United States, from the Gulf Coast to the West Coast. Its lines connect into Canada as well as Mexico.
In fact, it is the only railroad company to serve all six major gateways in Mexico.
Domestic carloads make up 61% of the company’s freight while Mexico accounts for 11% of its carloads.
In 2017, its freight revenue was roughly balanced between four major business units: Premium (29%; example shipment: finished vehicles), Industrial (26%), Energy (23%), and Agriculture (22%).
UNP was in the news during the final week of January 2019 after reporting its quarterly earnings.
Revenue and earnings topped analyst estimates, marking the fourth time in a row that UNP beat the consensus. It gave the stock an almost 4% boost in trading.
The CEO of Union Pacific [NYSE: UNP] credited a growing economy, as well as several internal factors that he expects, will continue, like the company’s cost-cutting efforts.
Union Pacific’s operating margin is now at 62% from 58% last year.
Also, UNP managed to increase its freight revenue by 7% in 2018 while its tonnage increased by only 6% and its average revenue per car went up by 5%.
Union Pacific is currently trading at $159.52 on a 52-week range of $121.22 to $165.63. The stock pays a dividend yield of close to 2%.
Norfolk Southern Stock Buy or Sell?
Norfolk Southern [NYSE: NSC] is primarily concerned with freight. The company transports raw materials and finished goods throughout the East, Midwest, and Southeast.
It also works through ports on the Atlantic and Gulf Coasts to send freight overseas.
Roughly 60% of the company’s revenues come from the transportation of merchandise, like chemicals, consumer products, agriculture, metal, and automobiles.
Intermodal shipments such as the containers used on international steamship lines make up 23% of NSC’s revenue while coal revenues account for the remaining 17%.
NSC also recently reported its fourth-quarter earnings. The company beat earnings estimate, with a 4Q EPS of $2.57 per share.
Some analysts were only expecting $2.30. Looking at its annual performance, NSC posted a 67.4% operating ratio and total earnings per share of $6.61, which is 18% higher than in 2016.
The company’s free cash flow was even more impressive, growing by 33%. Norfolk Southern also raised its dividend by 7.5%.
Right now, Norfolk Southern is trading at $165.35 on a 52-week range of $127.79 to $186.91. The company pays a dividend yield of 1.85%.
Best Railroad Stocks To Buy: The Bottom Line
Railroad stocks are a solid addition to many portfolios because of the way they perform relative to certain commodities and the way they reflect the condition of the economy as a whole, but you have to be careful. They are also vulnerable for the same reasons.
Environmental concerns could also prompt the use of more freight transportation, but that is a big bet given the uncertainty of the economy as well as issues relating to trade.
When it comes to returns, railroad stocks were seriously outperforming the S&P 500 since February 2018.
The recent changes to NAFTA (now the United States Mexico Canada Agreement– USMCA) seemed to have been behind the push, but worries over the future of the economy as well as issues with trade between the United States and China are eroding most of those gains. While some railroad stocks will recover, others may not. There is a fair amount of uncertainty in this sector right now.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.