Should You Buy Norfolk Southern Corporation (NYSE:NSC) For Its Upcoming Dividend?

By
Simply Wall St
Published
October 29, 2021
NYSE:NSC
Source: Shutterstock

It looks like Norfolk Southern Corporation (NYSE:NSC) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Norfolk Southern's shares on or after the 4th of November will not receive the dividend, which will be paid on the 19th of November.

The company's next dividend payment will be US$1.09 per share, on the back of last year when the company paid a total of US$4.36 to shareholders. Calculating the last year's worth of payments shows that Norfolk Southern has a trailing yield of 1.5% on the current share price of $293.05. 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 check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Norfolk Southern

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Norfolk Southern paid out a comfortable 34% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 37% of the free cash flow it generated, which is a comfortable payout ratio.

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.

historic-dividend
NYSE:NSC Historic Dividend October 30th 2021

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Norfolk Southern's earnings per share have been growing at 18% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Norfolk Southern has delivered an average of 11% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

Final Takeaway

Is Norfolk Southern an attractive dividend stock, or better left on the shelf? Norfolk Southern has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. It's a promising combination that should mark this company worthy of closer attention.

On that note, you'll want to research what risks Norfolk Southern is facing. Our analysis shows 1 warning sign for Norfolk Southern and you should be aware of this 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.

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