Trade: Swapped More CSX for UPS

For transporters, the cost of gas will be a 'driving' force in future profits and the ability to transport more commodities and less retail products will be beneficial. For that fact, Stone Fox has decided to swap shares in UPS for a bigger focus on CSX. Both were favorites of the NetPayout Yield Portfolio for decent dividends and a history of buybacks.

Unfortunately for UPS whether public perception or reality, the cost of fuel will likely continue to hinder the amount of products shipped going forward. Even if it doesn't, its likely to hold the price of the stock down and competition with FedEx and USPS is likely to hold down profit growth regardless. Not to mention that legal documents that used to be delivered via Express services will likely move to a sort of digital format reducing the need for UPS services because it can be done cheaper and is more economical and even greener.

Fortunately for CSX, the increasing cost of gas and likelihood that it will stay higher increases demand for the cheapest shipping method and most fuel efficient. Also, CSX greatly benefits from the demand for commodities such as coal, fertilizers, and ethanol. These goods can't exactly be shipped via a digital format. Railroads also face less competition and pricing power as new rails are almost impossible to get built.

In the end, its just a call that railroads have a better mix of products to ship and less costs from fuel. Either way, both CSX and UPS will move with the ultimate growth of the world markets, but we think CSX will move more.

Net Payout Yield: CSX

The railroad stocks like CSX (CSX) have been out of favor for awhile because of declining shipments. CSX though continues to maintain a 2.8% dividend while attractive, its not overwhelming in this environment where stocks move up or down by 20% sometimes in a day. We like to look at the Net Payout Yield as its been deemed more reliable in studies as a predictor of a stocks potential. View my old articles for more detail.

The stock buyback portion of the Net Payout Yield makes this stock more enticing. For 2008, CSX bought back $1.5B of net stock. For a company with a current market cap of $12.1B thats an impressive amount. Unfortunately for Q109, CSX didn't purchase any stock with the turmoil in the markets. That leaves the trailing 12 month buyback at $1.2B or 10% of the current market cap for a whopping yield of 10%. Combine that with the 2.8% dividend and the Net Payout Yield is an impressive 12.8%. Obviously CSX will need to get back to buying up stock for this yield to remain high.

Since we don't suggest investing blindly on this measurement, its always best to review the prospects of the company. Railroad shipments and revenues were down 17% YOY in Q1. Not too surprising considering the economy. The good news is that CSX still managed to earn $0.62 in the quarter so the quarterly dividend of $0.22 has very good coverage assuming the economy bottoms out. From a competitive position, we also like their position going forward as railroads tend to be cost effective compared to other forms of transportation and their isn't any new competition coming on board. Unlikely to see much in the way of new railroads especially in main shipping areas due to congestion and lack of space.

This all adds up to Stone Fox initiating a position in CSX. As the economy picks up so will the demand for CSX services and the additonal earnings will lead to higher dividends and more buybacks.

Long CSX in Net Payout and Hedged Growth Funds

Trade: Bought CSX

The market has been too crazy to keep up with posts. Both the Hedged Growth and Net Payout Funds bought CSX at the close yesterday - May 5th. The stock has a good 2.9% yield and over a 10% buyback last year giving it an incredible new payout yield approaching 15%. Of course, the buyback might be lower in 2009 lowering the yield, but we'd expect the rails to start benefiting from a recovery in the economy and growth in China. More to come later.