kgbw49 Bit it is not less paid out to shareholders if they increase the dividend per share. Correct share buybacks are not unique to railroads. But they have proliferated based on the artificially low interest rates of the last approximatsly 14 years. Railroads are just part of the party. Several of them have tripled their debt outstanding from 2008. Whike they can afford the interest payments now, as they rollover at higher interest rates, their interest burden will increase correspondingly. If you don't have increased volume to help generate revenue to support the increased interest load, that is when the debt burden really starts to bite. You will know an entity is being squeezed when it starts cutting its dividend. You are going to see this on steroids in the commercial real estate segment of the economy over the next three years. Debt coming due that needs to be refinanced. Refinancing at much higher interest rates. Not enough tenant revenue to pay that higher interest expense. Declare bankruptcy and turn the keys over to the bank. Then the bank will take a haircut and if cash reserves are too low, it could be bye bye bank. Watch the dividends of the Big 5.
Bit it is not less paid out to shareholders if they increase the dividend per share. Correct share buybacks are not unique to railroads. But they have proliferated based on the artificially low interest rates of the last approximatsly 14 years. Railroads are just part of the party. Several of them have tripled their debt outstanding from 2008. Whike they can afford the interest payments now, as they rollover at higher interest rates, their interest burden will increase correspondingly. If you don't have increased volume to help generate revenue to support the increased interest load, that is when the debt burden really starts to bite.
You will know an entity is being squeezed when it starts cutting its dividend.
You are going to see this on steroids in the commercial real estate segment of the economy over the next three years.
Debt coming due that needs to be refinanced. Refinancing at much higher interest rates. Not enough tenant revenue to pay that higher interest expense. Declare bankruptcy and turn the keys over to the bank. Then the bank will take a haircut and if cash reserves are too low, it could be bye bye bank.
Watch the dividends of the Big 5.
I have yet to see a dividend increase tied to a share buyback. Usually dividend increases are announced just before some bad news.. to soften the blow of, say, missed earnings or worse overall performance than anticipated. Companies do this so that shareholders don't leave in droves, driving down the value of the stock. So when I hear an announcment of a share dividend increase I think to myself.. oh oh.. brace yourself for some bad news. And I view a higher than average dividend yield with a great deal of skepicism.. it's not as if companies want to be generous with their shareholders for no reason.
I don't think the big players, those that are short term players, care as much about dividends. They want to see rises in the price per share. The bigger the better.
That Soroban Capital that wants Jim Vena in charge at UP mentioned that he could get the stock price to $400. I don't think they care about the long term future of the railroad.
Jeff
Yes dividend increases are not tied to share buybacks. It is what gets frozen or cut if capital is tight and an entity is over-leveraged.
Like the commercial real estate market situation, it will not be something that happens next week or next quarter.
It will happen when they have to start rolling over the debt they issued at low rates that will have to be renewed at double or triple the former rate, or more.
If volume is not up enough to provide operating income to make the higher interest rate payments, that is when the bite comes.
Lots of railroad debt will need to be refinanced later in this decade.
Until then, let the good times roll, pile up the debt for share buybacks, limit capital reinvestment, and take whatever cash you can out of the company.
Every financial strategy works until it doesn't. Even Bernie Madoff's. Even the Federal Government's.
The current financial strategy of a lot of companies was built on artificially low interest rates engineered by The Fed for the better part of a decade. They did it way longer than they should have.
That paradigm is shifting. When that cheap debt needs to be refinanced, that is when we will see if the piper is paid.
kgbw49Lots of railroad debt will need to be refinanced later in this decade.
Help me to understand this.
Someone (in this case a RR) borrows money during a low interest rate period. Let's say, $1,000,000 at 3% interest, with a 10 year repayment period. Three years in, interest rates go up. Why wouldn't the RR simply continue paying back the loan at the original 3% interest for the balance of the 10 years? Why would they refinance the debt at a higher interest rate? Or are the types of loans taken out by RRs more akin to a variable rate mortage, where the interest rates fluxuate with the market?
Financial structure of a corporation consists of debt and equity, as it does on our personal lives. How the structure is built depends on a number of factors but I will try to keep this simple.
What can a company do with cash generated? Pretty simple...three choices. Return to owners in form of dividends, reduce the number of shares (buybacks), or invest in the company. This cash which is generated is not necessarily the net income. A more accurate accounting is the Cash Flow statement. Often that statement is examined before the net income statement.
Full disclosure, I own one of the major railroads and have since 1994. I pay attention to their quarterly and annual reports.
Last year the railroad (CN) generated $6.667B in cash. Of that they invested a net of $2510 in their company in the form of equipment and capital improvements...lots of capacity improvements in Western Canada and other locations. They returned $2.0B to owners in form of dividends. They also purchased $4.7B in shares (a big chunk!). They also took on an additional $1.9B in debt, increasing their overall LT debt to $14.3B. Their equity stands at $21.3B.
CN has a healthy balance sheet. They took advantage of low interest rates and borrowed wisely. They generate enough cash that this debt can adequately be serviced.
Their dividends have steadily increased over the years, typically in the 6-10% range. In the last 3 years their number of shares has dropped from 712 million to 671 million.
Perhaps the era of PSR is evolving. It is unknow as I am not employed by rails, nor do I have access to ask the CEO or board members. The comments and actions lately seem to point to that with the actions of CSX and NS (other than their E. Palestine derailment they seem to be setting a new course).
Ed
If one gets a chance, take a look at UP and their annual reports since 2008.
Track the long term debt.
They have been touting for years that they have been returning more than 100% of net earnings to shareholders.
That happens only one way - take net income from future years by borrowing to pay out the borrowed cash now as share buybacks and pay the interest out of future operating income.
That works until it doesn't. It is a great ride while it does. Higher interest rates are most likely to have an impact when debt needs to be rolled over. The current management will be long gone and a future generation of management will be left to deal with it.
kgbw49... That happens only one way - take net income from future years by borrowing to pay out the borrowed cash now as share buybacks and pay the interest out of future operating income. That works until it doesn't. It is a great ride while it does. Higher interest rates are most likely to have an impact when debt needs to be rolled over. The current management will be long gone and a future generation of management will be left to deal with it.
Standard 'up and commer' modis operandi. Create a mess, rape the funds and leave. Someone else will have to clean the mess and make things operational.
Never too old to have a happy childhood!
Many loans to business may have various interest esculator clauses. A very partial list can include: How much long term debt, debt increases or decreases, profit and loss changes, overal business trends ( ex buggy whip builders ), war, US FED and other similar countries actions, accidents (NS ), ec.
zugmann oltmannd You can't grow volume without a top-performing product. That means all parts have to work well together. Managment's prime job is to facilitate work that supports the product. Wick Moorman tried 10 years ago with NS. Problem is there was no buy-in from just about every manager below him. And if the mngmt doesn't buy into it, what hope is there for the labor? Decades and decades of mistrust aren't going to be erased overnight. And with the last contract process, we're still a long way away from harmony.
oltmannd You can't grow volume without a top-performing product. That means all parts have to work well together. Managment's prime job is to facilitate work that supports the product.
Wick Moorman tried 10 years ago with NS. Problem is there was no buy-in from just about every manager below him. And if the mngmt doesn't buy into it, what hope is there for the labor?
Decades and decades of mistrust aren't going to be erased overnight. And with the last contract process, we're still a long way away from harmony.
Things went quite a ways backward after Conrail dissolved. Perhaps if Wick was followed by someone less scattershot than Squires...
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
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