CSX DRIP Investment Initiated

Update 11/16/2015: I recently transferred my shares out of the CSX DRIP and into TD Ameritrade. I found the Broadridge CSX DRIP to be a complication on my finances, and they charged higher fees.

For a guide on transferring shares out of a DRIP program, check out this post on the subject.

Update 10/25/13: As of yesterday the CSX transfer from Computershare to Broadridge is complete. Computershare now lists CSX in my account as “No Longer Transfer Agent”. 

CSX DRIP

A map of CSX railroad lines. Source: Wikipedia Commons

After my previous post digressing into wanderlust and a scorpion tattoo that never happened, I am back to writing about my investment income portfolio.  Last weekend I initiated a position in CSX Corporation through my Computershare dividend reinvestment plan (DRIP) and direct investment account.

I have always had my eye on the railroad sector as an investment, but until now have never owned any stock. While not an exciting business, it certainly qualifies as a great American industry.

My watchful eye perked up further when Berkshire Hathaway bought Burlington Northern in 2009.  Today I consider myself late to the game on railroads, wishing I was in about ten years ago.  But I am looking ahead 18 years to my retirement, buying companies that will be around and paying higher dividends. CSX is a dividend growth stock in a vital national industry that I believe will solidly add to my retirement nest egg and investment income portfolio.

Founded in 1986, CSX was the result of a merger between the Chessie System railway holding company, and the Seaboard System Railroad. CSX has more than 21,000 miles of rail in the eastern US covering 23 states and 2 Canadian provinces. It also serves more than 70 ocean, river, and lake ports and connects with 240 regional railroads.

The transportation of goods and materials is an essential business and rail is an inexpensive option for shipping raw materials and freight.  From the Graham/Buffet school of evaluation, railroads have a wide moat. You cannot just start a railroad business.  The rails have property and assets built over a very long period that serve as a solid investment foundation. And as Warren Buffet said of his investment in Burlington Northern, buying it is “a bet on the country, basically”.  This holds true I believe for CSX.

Why I Chose the CSX DRIP Over Other Railroads

The first investment book I ever read about investing was One Up On Wall Street: How To Use What You Already Know To Make Money In The Market by Peter Lynch. Since then, I try not to over-analyze long-term stock purchases like this one. I look for earnings growth, value, consistent dividend payment and growth, and businesses that I understand. After the first share purchase, I will be dollar cost averaging and reinvesting dividends to accumulate more shares.

In addition to the CSX DRIP, I considered investing in two other railroad stocks, Union Pacific (UNP), and Norfolk Southern (NSC). Nearly every day I drive by CSX and NSC rails and trains, both being prevalent on the east coast.  UNP is more of a mid-west to west line so I am not as familiar with their rails.  UNP also has a much larger market capitalization.

I try to diversify my general portfolio between small, mid, and larger capitalization companies, not always choosing the largest company in each sector.  Because UNP operates in another part of the country from my familiarity, and its larger size, I decided to shy away from it toward the other two, even though its balance sheet is bit stronger and it is considered by many to be best of breed.

Another positive aspect of purchasing one of the smaller players is the greater potential to be overtaken, an opportunity to get a nice bump in the share price. This recently happened to my DRIP holdings in Heinz.  Below is a sample of the fundamentals that I analyzed for this initial purchase:

 

Forward PE

PEG

Profit Margin

CSX

12.89

1.25

16.03%

UNP

14.29

1.21

19.39%

NSC

12.54

1.14

15.85%

 

Cash

Debt

Market Cap

Ent Value

D/E Ratio

CSX

1.02B

9.38B

25.82B

34.67B

2.20

UNP

1.84B

9.81B

70.60B

80.86B

1.39

NSC

.587B

8.61B

24.29B

32.59B

2.00

 

Dividend Yield

Payout Ratio

CSX

2.30%

31%

UNP

2.00%

30%

NSC

2.60%

37%

 

Sept 2003 Ann Dividend *

Sept 2013 Ann Dividend

10-yr Avg Div Growth Rate

* split adjusted
CSX

0.0667

.60

27.60%

 
UNP

.46

3.16

23.90%

 
NSX

.32

2.08

23.10%

 

(Data sourced from Yahoo Finance)

As in many industrial businesses, the stocks are valuated relatively closely and generally trade in tandem.  What I took away from my analysis is that UNP trades at a premium due to having less leverage on the balance sheet and higher profit margins.  This also explains the lower dividend yield.  NSC edges out both CSX and UNP in PE and PEG ratios, but is slightly less profitable. Its yield is also the highest, however it increased its dividend most recently and its payout ratio is the highest.

The conclusion I came to is that all three rails are solid long-term investments in this industry.  Based on the balance sheet, CSX is slightly riskier due to its heftier debt position. Usually with investments I shy away from the higher leveraged companies, but in this case in this industry, the debt load I believe is reasonable.  CSX also potentially has more room for its dividend to grow.

Lastly, the CSX DRIP and direct investment plan was in administered by Computershare where I already had an opened account. Had I decided to go with NSC, I would have bought it in my TD Ameritrade account instead of their DRIP administrator, Amstock, forgoing the DRIP strategy.

Risks Going Forward

My rental property is located right next to a NSC rail line and a decommissioned coal fire power plant.  No more coal is being delivered rendering the rail line to the plant useless.  The coal power plant closed in 2012.

I was quite happy to see the power plant near my condo close because it is good for the community and will eventually increase the value of my property.  As a long-term environmental trend, closing coal power plants will greatly improve the air we breathe.  But the delivery of coal to power plants is a big part of CSX’s business. While a moderate risk to the industry, the decrease in coal freight can be offset with other cargo over time.  Intermodal transport, or freight that is shipped in a container, is a growing business for CSX as is transporting oil and chemicals.

Conclusion

CSX may not be considered best of breed and is not the biggest railroad in the US.  It is, however, a profitable and relatively stable business, well-managed, and in an industry with a very wide moat.  The CSX DRIP was good time for me to initiate a position; recently off its highs, but in a market up trend.

If the market and stock goes higher, I will not miss out on the upside. If when the Federal Reserve begins to taper and raise rates and the stock moves lower, I can take full advantage of dollar cost averaging and buy more shares.

The CSX DRIP plan materials on the Computershare website (now on Broadridge) indicate that the fees are very low for this stock, and I can start my position with a minimum of $500. From here on, I will contribute $100-$200 on a monthly basis and build my position over the next few years, adding extra on big dips and cutting back a bit if the company becomes overvalued. I will reinvest all dividends to buy more shares, a strategy that will consistently add to my annual investment income which is a strategy that has been successful for me over the past 15 years.

Disclosure: Long CSX

I track my CSX investment and all parts of my financial life with one sign-in at Personal Capital. Since I learned about this 100% tool, I’ve thrown out all of my net worth calculation spreadsheets. That was liberating. Click here to learn more about Personal Capital.

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10 Responses to CSX DRIP Investment Initiated

  1. Dividend Growth Investor October 21, 2013 at 9:52 pm #

    Nice article about a recent purchase in CSX. I have looked into railroads, and think that Buffett probably is correct about them for the next 100 years. The good think about actually owning a business is that you get the excess cash that the business previously (before you acquired it) spent on dividends and buybacks. I think that in the case of Buffett, he made something like a $2.250 billion in distributions from Burlington Northern in 2011. This is a 6% yield on a 36 billion investment in total.

    However, I do not like the valuation on any of the railroads presently. I might wait for lower prices ( I could probably wait for a few years too though)

    Have you been following Bill Gates’ Cascade Investments? He is a large holder of Canadian CNI…

    • retirebeforedad October 22, 2013 at 6:26 am #

      DGI,

      Thanks for stopping by. Buffet always gets a better deal than us! Oh well. I would not be buying CSX if I were using my trading account because its not at a valuation I would normally find attractive. In the past I’ve had success DRIPing, and slowly accumulating shares while gradually lowering my basis over many years. This way I take advantage of the dividend increases and participate in the growth over time. If the stock price does fall to a better valuation, I pick up shares at a lower price and lower my basis even more. I did look at CNI but decided to leave it out of the post to simplify the topic a bit. I have followed what Gates does in his philanthropy, but not Cascade. I did just check it out, and I was surprised with some of his holdings (I don’t think it was a complete list).

      -RBD

  2. Pretired Nick October 22, 2013 at 2:03 pm #

    I’m a huge railroad fan, although i worry we’re always one election away from them ripping up all the tracks. Over the next 20 years, though, I expect rail to expand greatly and the companies with a lock on this transportation avenue are going to clean up.

    • retirebeforedad October 22, 2013 at 2:09 pm #

      Yeah I don’t like that there is some politics involved, especially in terms of the tax code. But the assets are undeniable and the cost is low. Can’t see that changing any time soon.

  3. Martin October 26, 2013 at 11:44 pm #

    Love your website. Mainly that badge showing years to retirement is so cool. I think I will create something similar and put it on my blog too. It is really great.

    I do not have any opinion on CVX but from the metrics you are showing it doesn’t look like a bad investment. the only what bothers me is the higher debt.

    • retirebeforedad October 27, 2013 at 1:13 pm #

      Thanks, and thanks for checking things out. That badge is a simple WordPress widget. Should be easy for you to add. Helps me focus on the date!

      -RBD

  4. sarge January 8, 2014 at 5:05 pm #

    Computershare was better than Broadridge thus far. On two different holdings, CSX and Spectra, I have had difficulties and delays confirming purchases. So far unimpressed with Broadridge clerks who cannot answer questions.. Computershare seemed much more efficient. Is anyone else having issues with Broadridge since CSX switched ?

    • retirebeforedad January 9, 2014 at 1:29 pm #

      So far I’ve been happy with Broadridge, but it is a simple platform with not a lot of frills. I haven’t called speak to anyone so I don’t know how that is. I think they have a big business opportunity to take more business from Computershare. I think Computershare over-engineered their latest website, and they have a lot of clients, so its inevitable companies will eventually leave. Especially if another company does it at a lower price.
      -RBD

      • sarge January 9, 2014 at 5:41 pm #

        Thanks for your comment. With any direct invest situation, it is never as quick as a regular brokerage account, but I was having difficulty getting Broadridge folks to understand that my inquiry referred to a one time purchase (done every Thurs) and not to a regular monthly purchase (done on 25th of month). I spoke with 2 people, and “chatted” with a third, trying to confirm when purchase would be made. They all insisted that funds received on 12/31 would not be used to purchase stock until Jan 25th. This was not correct. Oh well, I will continue to acquire CSX. GE seems to be headed for a good 2014 ? I also have purchased Spectra Energy. Was looking at Phillips 66, but waiting for a dip (?)

        • retirebeforedad January 9, 2014 at 8:15 pm #

          Yeah sometimes the delays are frustrating and they should be more clear what day it will trade and at what price. That’s the way it goes with direct invest. You’d think things would speed up some day. I owned GE years ago but sold it and picked up EMR instead for the more reliable dividend and smaller size. I haven’t looked at GE in a while. PSX has been a rocket ship recently. Who knows if the pullback will ever happen at this rate! Thanks for stopping by.
          -RBD

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