Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Norfolk Southern Corporation (NYSE:NSC) is about to trade ex-dividend in the next 2 days. You can purchase shares before the 5th of November in order to receive the dividend, which the company will pay on the 10th of December.
Norfolk Southern’s upcoming dividend is US$0.94 a share, following on from the last 12 months, when the company distributed a total of US$3.76 per share to shareholders. Based on the last year’s worth of payments, Norfolk Southern stock has a trailing yield of around 1.8% on the current share price of $209.12. If you buy this business for its dividend, you should have an idea of whether Norfolk Southern’s dividend is reliable and sustainable. So we need to investigate whether Norfolk Southern can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Norfolk Southern
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Fortunately Norfolk Southern’s payout ratio is modest, at just 46% of profit. A useful secondary check can be to evaluate whether Norfolk Southern generated enough free cash flow to afford its dividend. Fortunately, it paid out only 46% of its free cash flow in the past year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Norfolk Southern earnings per share are up 4.7% per annum over the last five years. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Norfolk Southern has lifted its dividend by approximately 11% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Is Norfolk Southern worth buying for its dividend? Earnings per share have been growing moderately, and Norfolk Southern is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Norfolk Southern is halfway there. There’s a lot to like about Norfolk Southern, and we would prioritise taking a closer look at it.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Our analysis shows 2 warning signs for Norfolk Southern and you should be aware of them before buying any shares.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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