The barriers to entering the railroad industry are very high. Creating a network of routes that connect between different parts of the continent would be very cost prohibitive.The costs of upkeep of track and vehicles is also very expensive as is training a workforce qualified to perform the duties required for safe and efficient transportation. Today, there are just a handful of railroad companies left in North America. It is very unlikely that there will be any new railroad companies so investors looking at this industry only have a few names from which to choose.

Entering the 10th year of the current bull market, unemployment remains very low and wages have increased slightly. This has led to consumers having more disposable income.In addition, energy prices have climbed which has helped to grow demand for these products. To be successful, railroads need a strong economy as more goods are transported with the economic conditions are improving. On top of this, all the railroads have seen in a decrease in tax rates as a result of tax reform legislation.

This article will discuss six railroad companies. All six stocks pay dividends to shareholders. You can find all six on our list of 747 dividend-paying industrial stocks.

We will look at each company’s business, recent earnings report, dividend history and our expected total return as seen in our Sure Analysis Research Database.We determine a total return based on current dividend yield, expected change in valuation and forecasted earnings per share growth.The following companies are ranked low to high in terms of our expected total return.

Top Railroad Dividend Stock #6: Union Pacific Corporation 

It was the Pacific Railway Act of 1862 that led to the creation of Union Pacific Corporation (UNP). The Act, signed into law by President Lincoln, authorized the Union Pacific Railroad Company to build a rail line west from the Missouri River. That line would meet another coming east from Sacramento. With more than 32,000 miles of rail throughout the western two-thirds of the country, UNP is the largest railroad company in the U.S. UNP has a market cap of more than $113 billion and had more than $21 billion in sales in 2017.

UNP reported 1st quarter earnings on April 26. The company earned $1.68 per share, beating estimates by $0.02.EPS increased 27% from the previous year.UNP’s revenue grew 6.8% to $5.5 billion.This came in ahead of estimates by $100 million. UNP’s operating ratio, the percentage of revenues that railroads spend on operating costs improved 0.6% to 64.6%. UNP expects its tax rate to fall from the mid 30% range to the mid 20% range.

Source: Union Pacific’s 1st Quarter Earnings Presentation, page 4

Total freight volumes were up 2%. A 6% increase in energy related products helped drive this volume growth. Coal declined as well, mostly due to demand for alternative energy sources. This is an issue several rails are facing. Grain volumes were down, as grain exports were weak. Volumes for agricultural products may have declined, but revenues for this product category were flat. Revenues for other types of freight were all up year over year, led by energy which was up 15% in the quarter.

UNP has rewarded shareholders with a dividend increase for the past 12 years, making the company a Dividend Achiever.

Click here to download your Dividend Achievers List Excel Spreadsheet now. Keep reading this article to learn more.

The company has increased its dividend at an average of almost 15% per year over the past 5 years. On February 8th, UNP increased its dividend by almost 10%. UNP is the highest yielding railroad company on our list, though that yield is very similar to that of the S&P 500 and well below that of the 10-Year Treasury Bond.

UNP has seen earnings grow at an average rate of 10% per year over the last decade, though much of this growth occurred in the years following the last recession. This is the case for many of the rails on this list. The last 5 years have seen earnings grow at an average of 4% per year. We expect earnings to continue to grow at this rate through 2023.

Shares of UNP has a current price to earnings multiple of 19.1. The stock has an average multiple of 16 over the last 10 years. If shares were to revert to their average price-to-earnings ratio, then the multiple would contract 3.5% per year. Combining earnings, dividends and multiple contraction, we feel that shareholders can expect a total return of 2.2% per year through 2023. That simply isn’t enough total return for us to recommend UNP at these prices. On a pullback, we would be more inclined to consider UNP.

Top Railroad Dividend Stock #5: CSX Corporation 

CSX began its long journey in 1827, when the B&O Railroad was chartered. The company started with 13 miles of track which has grown to 21,000 miles spanning 23 states. CSX connects stations in the densely populated eastern part of the United States. Trading at nearly all-time highs, CSX has a market cap of more than $58 billion. CSX generated $11.4 in revenue in 2017

CSX reported 1st quarter earnings on April 17. CSX saw earnings grow almost 35% year over year to $0.78. EPS topped estimates by $0.12. Revenue grew 0.3% to $2.88 billion, beating expectations by $50 million. CSX’s operating ratio improved 5.7% to 63.7%. Expenses declined 8%, leading to a 5.7% improvement in CSX’s operating ratio. At 63.7%, CSX had one of the lowest operating ratios on our list. The company expects to have a tax rate of 25% for the year, well below its usual mid 30% rate.

Source: CSX’s 1st Quarter Earnings Presentation, page 6

Total freight volumes declined 4% year over year, though revenue was up ever so slightly. Agricultural and Food Products was down sharply as exports have declined. This has been a common theme for several rails. Coal revenue was down, but coal exports saw strong demand in the quarter. On the bright side, CSX saw a 4% increase in Intermodal revenues.

CSX has increased its dividend for the past 14 years, making it the second longest growth streak on our list. The company has increased its dividend an average of 7.6% per year over the last 5 years. The most recent increase saw the dividend grow by 10%. Shares currently yields 1.3%.

Earnings have grown at a rate of 7% per year over the last 10 years. It’s true that most recent earnings report didn’t show much revenue growth, but the company has managed to decrease its expenses. This helped lead to a large increase in earnings  Due to improvements in operating efficiencies, we feel that CSX can generate 9% earnings growth going forward. This is the highest earnings growth rate of all the railroads.

Shares of CSX keep making new all-time highs. The downside of this capital appreciation is that the stock’s multiple has become stretched. The current price-to-earnings ratio is 20.9. The average multiple over the last decade is just 15, meaning that if the stock was to revert to its historical average, shares would contract 6.7% per year over through 2023. Between dividends, earnings growth and multiple reversion, we see shares offering a total return of just 3.6% per year over the next five years.

Top Railroad Dividend Stock #4: Norfolk Southern 

Norfolk Southern (NSC) was founded in 1980, making it one of the youngest railroad companies on our list. The company has tracks in the Southeast, East and Midwest of the U.S. NSC is headquartered in Virginia and transport freight between ports on the Atlantic seaboard and Gulf of Mexico. The company operates more than 19,000 miles of rail in 22 states and the District of Columbia. NSC has a current market cap of $44 billion and had $10.6 billion in sales in 2017.

NSC reported 1st quarter earnings on April 25. The railroad earned $1.93 per share during Q1, a 30% increase from the previous year. Revenues increased 6% to $2.7 billion. NSC’s operating ratio improved 1.3% to a record 69.3% from 70.6% in Q1 2017. This metric is still higher than several rails on our list, but the company was able to reduce expenses. NSC expects a tax rate of 22% for the current year, an improvement from last year’s rate by about 13%.

Source: Norfolk Southern’s 1st Quarter Earnings Presentation, page 6

Volumes were up 3%, led by strength in intermodal, which was up 8%. Intermodal revenue grew 19%. As with other railroads, coal continues to be a weak spot. Shipments within the U.S. were down, but exports were strong. Revenue per car load before and after fuel costs were positive during the first quarter.

NSC has increased its dividend 9 times in the last 10 years. The dividend has grown at an average rate of 7.2% per year over the last decade. The company last raised its dividend on February 2nd, resulting in an 18% increase. NSC’s stock currently yields 1.9%.

NSC suffered steep declines in earnings during the last recession, but has still managed to grow earnings-per-share by 4.2% per year over the last decade. As we have seen, coal has been a drag on NSC’s business but that drag hasn’t been as much of a hindrance in recent quarters. In fact, coal revenues per unit were up 8% in Q1 even as volumes were down. This has been the case for the past few quarters. As such, we feel that NSC can grow earnings by a rate slightly higher than it has historically. We see earnings-per-share growing at 6.4% annually for the next five years.

NSC has a current price-to-earnings ratio of 18.2, which is above our target multiple of 15.5. If shares were to revert to this price-to-earnings ratio, then shareholders would see the multiple contract 3.2% per year through 2023. Totaling up earnings growth, dividends and multiple contraction, we see shares of NSC returning 5.1% per year through 2023. While offering a better estimated total return than either UNP or CSX, we think that investors can wait for a better entry point before adding NSC to their portfolio. Perhaps investors should look north to find a railroad offering a better total return.

Top Railroad Dividend Stock #3: Canadian National Railway

Canadian National Railway (CNI), the first of two Canadian based railroads on our list, operates a network of ~20,000 miles of railroad in North America. The company connects to the Atlantic and Pacific oceans as well as to the Gulf of Mexico. CNI handles more than $200 billion worth of good each year while carrying 300 million tons of cargo .The company has a market cap of almost $62 billion and had $10 billion in revenue last year.

CNI reported 1st quarter of 2018 earnings results on April 23. The company earned $1.00 per share. This was in line with analysts’ estimates, but 14% below Q1 2017. Revenue declined slightly (0.6%) to $3.2 billion, though this figure came in $30 million ahead of expectations. Cash flow, which was a record $2.2 billion in Q1 2017, declined 62% in the first quarter. The company’s operating ratio increased 6% to 67.8% due to higher fuel costs and infrastructure investment.

The company said that a harsh winter in North America led to a weaker Q1 performance. Although CNI reports earnings in Canadian dollars, a large percentage of its sales and expenses are in U.S. dollars. Currency fluctuation cut $0.03 from the company’s earnings-per-share totals. CNI management also announced that expected earnings-per-share, in U.S. dollars, was $4.14 per share for 2018. This is a $0.12 below CNI’s initial 2018 guidance.

On the plus side, CNI recent historical performance holds up very well compared to its peers.

Source: CNI 2018 Investor Presentation, page 7

While they declined by 4% in the first quarter, CNI’s revenue ton miles, a transportation metric that measures the amount of freight carried, have increased by a compound annual growth rate of 4.1% since 2010. This is well above any of its railroad brethren. The company’s operating ratios have also beaten its peers every year for the past 8 years. While performance numbers were soft this past quarter, CNI has operated its business at a high level over the long term.

CNI has increased its dividend for 21 years. CNI has the longest dividend growth streak of all the railroad companies. The company has increased its dividend by an average of 11.2% per year over the past 5 years. The most recent increase boasted the dividend by 12.3%. Shares currently yield 1.7%.

CNI’s earnings per share grew at a rate of ~10% per year over the past decade.Growth has slowed over the last 5 years, with earnings increasing at a rate of 6.1% per year. We expect earnings growth to grow at 7% annually over the next 5 years.

Shares of CNI have an average price-to-earnings ratio of 16.9 over the past 10 years. Shares currently trade with a price-to-earnings ratio of 20.1. If shares were to revert to their historical average shareholders would see a multiple reversion of 3.4% per year through 2023. Add up earnings growth, dividends and multiple reversion and we see shares of CNI offering an annual total return of 5.3% per year. Investors looking for a railroad company with a long dividend track record should consider shares of CNI. Those looking for a much higher total return might want to consider the next two stocks on our list.

Top Railroad Dividend Stock #2: Canadian Pacific

The Calgary based Canadian Pacific (CP) operates ~14,000 miles of rail in Canada and the U.S. CP, the second Canadian railroad on our list, was founded in 1881 and has a market cap of almost $28 billion. CP generated $6.55 billion in revenue in 2017.

CP released first quarter earnings results on April 18. The company had adjusted earnings of $2.70 per share, topping estimates by $0.03. Earnings-per-share improved 8% from Q1 2017. Though revenue of $1.66 billion missed estimates by $10 million, this was still 3.8% growth from the previous year. CP’s operating ratio increased to 67.5%. The company did manage to deliver 6% more freight than the prior year’s quarter. Revenue ton-miles were also up 6% while carloads increased 4%.

Source: Canadian Pacific Railway Limited Q1 2018 Earnings Presentation, page 7

CP saw double digit growth in several categories, such as potash, energy and metals. Coal saw positive comps in the quarter, something that not every rail on our list can say. Grain, due to fewer exports, and automotive were the lone product categories not to see an improvement from Q1 2017.

As with other rails, CP blamed a harsh winter for results, though the cold temperatures weren’t the only culprit. Fuel costs were up 26.5% in the quarter while compensation and benefits cost rose 24.7%. These are headwinds for the company that are likely to continue as energy prices rise and unemployment remains low.

CP last raised its dividend on May 10, which increased the quarterly payment by 15.6%. CP has a payout ratio of under 17%, half that of most of the rails on our list. This leaves the company plenty of room to continue to pay and raise its dividend. One thing investors should be aware of is that CP has had to cut its dividend twice (2014, 2015) in recent years. While the payout ratio is low, shareholders can’t assume dividend growth is a given every year.

CP’s earnings have increased at a rate of more than 11% since 2008, though that growth has slowed to just over 6% over the last 3 years. We anticipate that CP can grow earnings at a rate of 6.5% per year over the next 5 years.

CP’s shares have traded with an average multiple of 19. With a price-to-earnings ratio of 18.9 currently, shares could see a slight multiple expansion (0.1%) per year through 2023. Combining earnings, dividends and multiple expansion, we feel that CP shareholders can expect total annual return of 8% per year going forward. An 8% annual return through 2023 is a very solid return given the length of the current bull market.

As long as the U.S. and Canadian economies continue to perform well, CP should benefit. If investors are looking for a Canadian based railroad, we suggest they look at CP.  Dividend growth is questionable, but CP offers the second best total return on our list.

Top Railroad Dividend Stock #1: Kansas City Southern 

Kansas City Southern (KSU) was founded in 1887 and has routes that tend to run North-South. The railroad connects the states in the central U.S. with Mexico. KSU had more than $2.5 billion in revenue in 2017. The company has a current market cap of more than $11 billion.

KSU reported results for the 1st quarter on April 20. The railroad earned $1.30 per share, an 11% increase from the previous year and a Q1 record, but this was $0.03 below what analysts were expecting. The company generated $636.6 million in revenue, a 5% improvement from last year. This was a little more than $8 million below estimates. The company’s operating ratio increased slightly to 65.8% from 65.4%. KSU’s tax rate is expected to be roughly 35% for 2018, down about 3% from the previous year.

Source: Kansas City Southern’s 1st Quarter Earnings Presentation, page 9

Automotive revenues were up 17% on 6% growth in carloads. BMW, Toyota and Mercedes/Infiniti have opened up three new plants in Mexico. With their South to North rails, KSU offers an important means of transportation for these vehicles headed for sale in the U.S. Intermodal had an 8% carload improvement, the strongest in all the categories for KSU. Energy, on the other hand, saw car loads decline 20%. In total, KSU saw car loads increase 1% year over year.

KSU has seen earnings increase at a rate of 12% annually from 2008 through 2017. As with all of the rails on our list, much of this earnings-per-share growth came in the year directly following the last recession. Still, we estimate that KSU can grow earnings at a rate of 8.4% per year going forward as the company takes advantage of new auto plants in Mexico as well as the expansion of the Lazaro Cardenas port, the country’s largest cargo port.

KSU has only been paying a dividend since 2012, but the growth has been impressive. KSU has increased its dividend by more than 18% per year over the past 5 years, though the most recent increase that occurred on August 15, 2017 resulted in a raise of 9%. KSU’s stock currently yields 1.3%.

KSU shares have the highest 10-year average price-to-earnings multiple (22.7) on our list of railroad companies. We have a target price-to-earnings ratio of 19. With a forward price-to-earnings ratio of 17.8, there is still some room for multiple growth going forward. We feel shares could experience multiple expansion of 1.8% through 2023.

The combination of earnings growth, dividends and multiple expansion gives KSU an estimated total return of 11.5% annually over the next 5 years. We feel that investors should strongly consider KSU if they are looking to add a railroad company to their portfolio.