How would you like to invest in a stock that has gained 170% in the last 5 years while paying a healthy 1.32% dividend in an environment where interest rates are close to zero? And bear in mind that these rates are expected to remain historically low for the foreseeable future thanks to the COVID pandemic. The stock we are talking about is a railroad company. In fact, it is one of the largest railroads in the US. Read on to find out more.
The tide may be turning for railroads
As the virus curve begins to flatten and the economy starts opening up, railroads are expected to be back to hauling important resources and products across the country. The top railroad company stocks are beginning to find favor on Wall Street as well. CSX and Norfolk Southern recently saw their stocks upgrade from Hold to Buy.
Consumer spending is beginning to pick up and railroad volumes associated with consumer spending are now above pre-pandemic levels. The industrial levels, however, are still not back to their pre-pandemic peaks. However, industrial activity continues to improve. Railroads, in general, are a good proxy for the overall health of the economy as they haul consumer and industrial goods.
So which railroad stocks to invest in?
If you are looking to buy railroad stocks, then you would want to consider how a railroad company earns its revenues. The more diverse its sources of revenue, the more resilient is the business model. CSX hauls coal, chemicals, automobiles, metal equipment, and also offers intermodal transport. CSX also transports agricultural products and fertilizers.
Secondly, you should also look at the operating ratio or the expenses-to-revenue ratio of a railroad company. The lower the ratio, the more efficient is the company. CSX has the lowest ratio (around 60%) among the top railroad companies. In terms of valuation, CSX currently trades at a P/E of 21 which is the lowest among the top 6 railroad companies by market capitalization. CSX definitely looks like a railroad stock to buy now.