CSX Corporation Stock: Buy Before The Train Leaves The Station

If you are a believer in a quick economic recovery for our country, several sectors are worth looking into for investment opportunities at this time. For example, the industrial sector has been completely disrupted by the global pandemic but could be coming back strong this year. Specifically, transportation companies have had to dramatically adjust their businesses to deal with the challenges presented by COVID-19. These are companies like airlines, trucking companies, and railroads that move people and things across the country.

While many of these companies are not completely out of the woods yet, some encouraging signs are coming out of the industrial sector at this time. One railroad stock in particular looks like it could be heading higher in the coming months. CSX Corporation (NASDAQ:CSX) operates the largest freight rail network in the eastern United States and the stock is breaking out of a few months of consolidation, making it a great option for investors that are interested in adding shares of one of the top names in the industrial sector. Let’s take a further look at why CSX is a buy below.

A Leader in Cost-Efficient Rail Deliveries

If you aren’t familiar with the rail industry, it’s important to understand that rail traffic is usually used to judge the status of economic activity in the country. Since many of these companies including CSX Corporation transport industrial materials across the United States, if they aren’t seeing heavy traffic, it could be a concern for the overall economy. That’s why investors who are confident that our country is heading in the right direction in terms of a rebound should be looking at a company like CSX.

The US rail industry is an oligarchy, with only 4 major companies generating 88% of the industry’s revenue. CSX is one of those 4, meaning that investors are adding an industry-leading business. It operates the largest freight rail network in the eastern United States, with over 26,000 miles of track connecting commercial markets across many of the largest cities in the country. Consumer product shipments have boosted the company’s intermodal volumes already, and if industrial activity picks up quickly this year CSX will benefit greatly.

Investors can break CSX down into three business lines, merchandise, intermodal, and coal. Merchandise includes shipments of tons of different things like agricultural and food products, metals, automotive, chemicals, and forest products. The coal business line involves shipping domestic coal, coke, and iron ore to power plants and steel manufacturers. Finally, the intermodal business uses trucks and terminals to help customers take advantage of the company’s large railway network. Intermodal shipping has several advantages over truck companies, as it can help to reduce costs, mitigate shipping risks, and provide a fuel-efficient way to transport things across land. The company saw 7% year-over-year volume growth in this business line in Q3, and it could be a strong growth driver going forward.

Share Buybacks & Dividends

Another reason to consider adding shares of CSX Corporation at this time has to do with the company’s share buyback program and dividend payouts. In Q3, the company’s board approved a $5 billion share repurchase program which should help to improve the company’s EPS, even though the pandemic has temporarily caused a decline in overall volume. Thanks to the existing $1.1 billion in the previous buyback program, the company will be buying $6.1 billion in outstanding shares. While reducing the number of outstanding shares isn’t the right choice for some companies, a mature company with strong cash flows like CSX uses buybacks to return wealth directly to shareholders.

There’s also the dividend payouts that investors will receive from investing in CSX. While the current 1.13% dividend yield isn’t all that high, the fact that CSX has a 3-year dividend growth rate (CAGR) of over 10% is certainly appealing. While you might be concerned about the company’s ability to maintain its dividend due to the impacts of COVID-19, CSX generates enough free cash flows to ease those concerns. With a Cash and Cash Equivalents figure totaling $2.8 billion at the end of Q3, it’s clear that the company has a strong financial position.

Final Thoughts

With minimum competition thanks to its massive freight rail network and a diverse customer base, CSX could reward investors with long-term growth, particularly since the economy might be recovering sooner than many anticipate. The company is already reporting a strong increase in rail volume, as CSX saw total volume increase by over 21% between Q2 and Q3. The stock is up 6.8% already in 2021 and is a solid pick for any investor interested in exposure to the transportation sector.

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