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US Railroad CSX (NASDAQ:CSX) is probably not the first name that springs to mind for UK investors when talking about passive income. There are several reasons for this.
$34.27
$0.45
(1.3%)
Friday, August 30, 2024 at 21:00:00 British Summer Time
The stock doesn't stand out for its 1.43% dividend yield, but I think there's a lot more to it than meets the eye.
Dividends vs passive income
Let's start with the hot topic: dividend yields aren't going to capture the attention of fixed-income investors. But there's a lot more to passive income than dividends, and CSX's track record over the past decade is a good example of that.
The company has reduced its number of shares outstanding by approximately 4% annually through share repurchases, providing shareholders with a significant income opportunity.
By selling 4% of their shares each year, investors have been able to generate cash. And the declining number of shares means their stake in the overall business has remained the same.
From an income perspective, that means CSX offers more than just a 1.43% dividend yield. The actual yield available has been closer to 5% on average, which is much more attractive.
Reliable cash flows
Beyond performance, CSX has many positives from an investment perspective. It is a freight railroad that makes money by transporting raw materials and finished goods throughout the eastern United States.
The first thing I like is the lack of competition: just South Norfolk does the same. And the prohibitive cost and logistical difficulty of establishing another railway means that this is unlikely to change.
Another advantage is the offer for customers. Transporting goods by this method generates fewer carbon emissions and is much cheaper than road transport, making rail the only viable option for a large amount of bulk goods.
As a result, CSX maintains operating margins of around 38%, higher than those of companies like Alphabet and AppleThis demonstrates the power of a dominant position in an important industry.
Volumes
CSX's biggest risk is its exposure to coal, which accounts for about 15% of revenue. And there's no getting around the problem that demand for the fuel is going to fall as the U.S. transitions to renewable energy.
It's worth noting that the shift to cleaner energy sources might not be as bad as it sounds. For one, much of the coal CSX transports is exported to other countries where demand might be more robust.
Moreover, not all coal is used to generate energy. Some is used in steelmaking, and this demand is also likely to remain relatively stable.
But most importantly, building renewable energy infrastructure will require huge amounts of raw materials, which will have to be transported back and forth, likely by rail and through the CSX network.
A long-term investment
I consider CSX to be an excellent long-term investment. Despite the company's huge margins, its stock trades at a price-to-earnings (P/E) ratio of around 15.
For a company with a long-standing competitive advantage in an industry where demand appears strong, this is a powerful combination. That's why I've been buying it for my stocks and shares ISA.