You are a RR CEO do you Reinvest profits in Railroad Infrastucture Or pay divididends?

[MP173]

PL:

We have briefly discussed the Bronson book. What is the title of that and I will retrieve it thru the local library and read it.

BTW, a recent CTC board had a great photo spread by Ron Flannery on Southern color shots. He is putting out a color book on Southern and these shots were probably the seconds or rejects. If only I could take such "rejects". It should be a great book.

I was lucky that I spent an afternoon in the mid 70's at Salisbury, NC and got some decent shots.

ed

[Anonymous]

QUOTE: Originally posted by MP173

PL:

You posted earlier about reducing the interest payments by replacing 8% bonds with 5% bonds. That can be done if the bonds are "callable".

"The ability to call bonds protects issuers by enabling them to retire bonds with high coupons and refinance at lower interest rates. Calls are bad news for bondholders. A high interest rate, thought to be locked in, disappears and the bondholder is forced to reinvest at lower rates." (The Bond Book, Annette Thau, page 17).

If I want to take a nap, I grab Ms. Thau's discussion of bonds and read awhile. Within 10 pages I am dozing. Nothing against her, nor her book, but bonds really put me to sleep.

Her book is the "bond book" although Larry Sweedroe has a March release on what he has indicated will be the "bond bible".

Cant wait!

ed

MP137 - I first discoverd the tactic of what is called "refunding" (not to be confused with a refund for dissatisfaction w/ a product) in Muray Kleins Union Pacific vol II. UP in the 50's exchanged a great deal of their early 20th century higher cost bonds backed by the real estate of the company to lower cost debentures backed by Uncle Pete's good name and word, refunding is really another word for refinancing with a few securities qualifications. ---------------------------------------------------------------------------------------Today real estate, securities and life insurance types do something similar with what is called a 1035 exchange of one form of property, policy or security with another of greater or lesser value depending on the financial objective of the effected parties------------------------------------------The other school of thought on that is the Southern Railway meathod. Get lean, work hard, automate, mechanicalize, computerize and do it with less people and lower payroll useing the earnings to wipe out a debt. You will find that well documneted in the Bio of Mr Brosnan and how he and the Southern survived into the 60's and 70's. In otherwise work your tail off and pay off the debt in full or to a reasonable level.

[CSSHEGEWISCH]

Railroad bonds are issued by the railroads themselves, but usually go to the underwriter of the issue (usually an investment banking firm) since they lent the money. I would assume that the minimum denomination is in the five-figure range. You would be best to contact a stock brokerage firm for more information.

[Anonymous]

So who issues railroad bonds? What is the smallest denomination?

[MP173]

PL:

You posted earlier about reducing the interest payments by replacing 8% bonds with 5% bonds. That can be done if the bonds are "callable".

"The ability to call bonds protects issuers by enabling them to retire bonds with high coupons and refinance at lower interest rates. Calls are bad news for bondholders. A high interest rate, thought to be locked in, disappears and the bondholder is forced to reinvest at lower rates." (The Bond Book, Annette Thau, page 17).

If I want to take a nap, I grab Ms. Thau's discussion of bonds and read awhile. Within 10 pages I am dozing. Nothing against her, nor her book, but bonds really put me to sleep.

Her book is the "bond book" although Larry Sweedroe has a March release on what he has indicated will be the "bond bible".

Cant wait!

ed

[Anonymous]

QUOTE: Originally posted by CSSHEGEWISCH

The whole issue of retained earnings vs. dividend payments is cropping up in a lot of other sectors as well. Since stock appreciation has tapered off since the tech bubble burst and the tax laws have changed, dividends have become more important to investors. While some earnings should be re-invested in the business, sitting on a large pile of cash is a red flag to takeover artists and other such miscreants.

Sounds to me like you have been their.

[CSSHEGEWISCH]

The whole issue of retained earnings vs. dividend payments is cropping up in a lot of other sectors as well. Since stock appreciation has tapered off since the tech bubble burst and the tax laws have changed, dividends have become more important to investors. While some earnings should be re-invested in the business, sitting on a large pile of cash is a red flag to takeover artists and other such miscreants.

[Anonymous]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by Murphy Siding

QUOTE: Originally posted by TerminalTower

Well I could pass on the profits to my customers in reduced freight rates on certain lanes in the hopes that will atract more buisness.

That's a little too simplistic to actually work. You'd be much better off trying to bring new business, to add volume(and hopefully lower your costs to do business) or improve your service to existing customers, so you can charge them more for your service.

Actually, that's whats been happening since the Staggers Act, although it was surely no manifestation of altruism on the part of the railroads, but rather part of the Staggers Act they hadn't anticipated.

The shippers got far lower rates, the railroads got huge amounts of low margin and no margin business, had to rebuild the very capacity they had earlier claimed they didn't need, and they still couldn't earn their cost of capital.

The interesting thing about evaluating the Staggers Act is that if regulated rates had continued in effect, and the railroads had been able to actually benefit from the crew law changes, they would have been highly profitable businesses.

Deregulation permitted/required them to hand their profits back to the shippers, even as they were able to cut costs dramatically. Nearly every nickel in savings/profits went to the shippers.

Best regards, Michael Sol

Make that the biggest shippers. The smaller shippers seem to have been cut out of the loop altogether.

[Junctionfan]

I would give at least 30% to dividends to keep the shareholders happy.

Depending on the company's growth operations strategy, I would accomidate it to the best of the company's fiscal ability.

I would concentrate mainly on track upgrades, maintainance, capacity increases on conjested lines, locomotive upgrades (more powerful/ fuel efficient), and other key infrastructure requirements needed to grow revenues.

Another thing I would advice the company's board is that we should explore attempting to lure businesses close to our lines including our yards. If our company can help increase our revenues and keep the business close to our existing lines, it can increase our profits over time and if they are close to our existing lines, it will reduce the inflating costs of operation per fiscal year.

[Anonymous]

QUOTE: Originally posted by AMTK200

Personally I would reinvest it in the Infrastucture myelf.

Ditto.

Newer equiptment, less breakdowns and money robbing downtime.

Shareholders dont drive the trains, the railroad employees do and dont need to deal with junkers.

[MichaelSol]

QUOTE: Originally posted by Murphy Siding

QUOTE: Originally posted by TerminalTower

Well I could pass on the profits to my customers in reduced freight rates on certain lanes in the hopes that will atract more buisness.

That's a little too simplistic to actually work. You'd be much better off trying to bring new business, to add volume(and hopefully lower your costs to do business) or improve your service to existing customers, so you can charge them more for your service.

Actually, that's whats been happening since the Staggers Act, although it was surely no manifestation of altruism on the part of the railroads, but rather part of the Staggers Act they hadn't anticipated.

The shippers got far lower rates, the railroads got huge amounts of low margin and no margin business, had to rebuild the very capacity they had earlier claimed they didn't need, and they still couldn't earn their cost of capital.

The interesting thing about evaluating the Staggers Act is that if regulated rates had continued in effect, and the railroads had been able to actually benefit from the crew law changes, they would have been highly profitable businesses.

Deregulation permitted/required them to hand their profits back to the shippers, even as they were able to cut costs dramatically. Nearly every nickel in savings/profits went to the shippers.

Best regards, Michael Sol

[Murphy Siding]

QUOTE: Originally posted by TerminalTower

Well I could pass on the profits to my customers in reduced freight rates on certain lanes in the hopes that will atract more buisness.

That's a little too simplistic to actually work. You'd be much better off trying to bring new business, to add volume(and hopefully lower your costs to do business) or improve your service to existing customers, so you can charge them more for your service.

[MichaelSol]

QUOTE: Originally posted by kenneo
As Mac stated above, this process can cause bankruptcy, and in fact, one famous case resulted when the MILW kept paying out high dividends to keep up its share price in relationship to the CNW when it was attempting to merge with the CNW. The MILW stockholders loved it, but the money came from funds to pay the bills, buy equipment and maintain the RR. Finally, the money was no more.

Lawsuit-wise, the preferred shareholders initiated litigation to force Milwaukee to keep paying the dividend. Because it was paid out of capital, not earnings, there were no taxes on the income by the preferred shareholders. They liked that: a tax-free income. In an effort to restore or even recover some earnings, management began hiding some of its income, saving paymemts on its contingent interest bonds. The resulting lawsuit ended in a settlement agreement.

Wondering about that bankruptcy date of December, 1977? Milwaukee had a good cash position, good working capital, good cash flow, better than CNW and IC in that month. No real reason apparent on the financial record, until one is aware that the shareholder settlement payment was due January, 1978.

Best regards, Michael Sol

[kenneo]

Some sound business practices are advanced in the above messages (as well as some that are bad). But if you don't want to find yourself in a HealthSouth or an Enron legal situation, you absolutely must advance the stock price.

Some years ago, it was standard practice for a company to hold on to excess cash and increase the net value of the company by paying off debt and paying cash for items. Ican't remember the name of the corporation anymore, but they were doing this and not making any payments that would increase the share price. In fact, the share price was going down because of no dividends. A stockholder class action suit resulted with the verdict - in very brief terms - requiring a corporation to pay all or nearly all of its excess earnings (as in after tax profits) as dividends or to repurchase outstanding stock in the company. Either of these actions will drive up the share price.

So, how you do things now-a-days is to pay all after tax cash out as I noted above and then to finance all purchases, maintainence, expansions, and such. And, should you have a bad year, you finance the repurchase of company stock to keep up the share price or there will be a shareholder suit on your hands.

As Mac stated above, this process can cause bankruptcy, and in fact, one famous case resulted when the MILW kept paying out high dividends to keep up its share price in relationship to the CNW when it was attempting to merge with the CNW. The MILW stockholders loved it, but the money came from funds to pay the bills, buy equipment and maintain the RR. Finally, the money was no more. The MILW's case was, of course, more complicated than that, but this was the major problem. There are other threads on this forum that have discussed this subject in detail.

[karldotcom]

I make sure to run some commuter trains on my territories, and delay them every once in a while, preferrably Friday night.

I then tell the local government to pay for upgrades such as ATCS and double tracking so their commuter trains will be more efficient. And if they can afford some "grade separation projects" in the name of safety, I will take that too.

[Anonymous]

Well I could pass on the profits to my customers in reduced freight rates on certain lanes in the hopes that will atract more buisness. I would also offer more assistance in lowering the cost of Building industrail sidings. Employee retention is a problem even with railroad wages being higher then other transport pay. So I would look at inovative ways such as hiring Husband-Wife Conducter-Engineer teams and provding day care and educational Incentives for the family

[Anonymous]

The first thing I do is remind myself and the board that we are a TRANSPORTATION company first and foremost, not just a railroad. The shipper really doesn't care how a load gets there, just get it there at the price and time expected. With that being said....

Take a look at your own railroad capacity picture and compare that with any parallel capacity on highways and waterways. There are probably existances wherein certain commodities could be transfered from the congested railroad to an uncrowded waterway, while other traffic could be taken off congested highways and put on our railroad at a premium. Take some profits and invest in a barge line, then put our grain, coal, aggregates, even some of those non-time sensitive containers onto a barge at the nearest riverhead where available, then boost our intermodal fleet and go after some of that higher priced truckload traffic and put it on our newly freed-up capacity on our rails. Don't get hung up on the whole long haul vs short haul conundrum, just focus on maximizing our annual per car profit margins.

In ten years we're now in position to put away all the other railroads who were married to the old way of thinking, and Exxon-Mobile/Microsoft is knocking on my door.

[jeffhergert]

Senior management bonuses.

[Anonymous]

QUOTE: Originally posted by Limitedclear

Assuming I had an excess of cash, I would first increase loss reserves, then review company plans for capital expenditures. If feasible I would propose advancing planned projects or, if none plan and invest in perceived weak areas by adding capacity (a new siding or interlocking for example). In the event that was not necessary I would propose a stock buyback as set forth above by others (and is actually happening with several of the Class 1s right now)

LC

LC Here is an idea, refund (re-price) long term debt. Say from a 30 year General Obligation Mortgage bond at 8 and three quarters with 15 years to run and create a 10 year debenture or note at 4 and a half or 5%, saving on interest costs and freeing some of the property from mortgage obligation. Union Pacific did this back in the late 1950's and early 60's. I wonder if the CFO's of todays Class 1's could or would do something like that? Any thoughts? PL

[petervonb]

QUOTE: Originally posted by eolafan.... one must always generate more business at a greater profit level in order to pay more and bigger dividends

Gee, that's not the way they did it in the old days. If it were, we would still have the Rock Island, and probably a few more railroads, around.

If one doesn't bother to maintain or improve the property, one can make bigger profits (or at least maintain existing levels) and thus continue to pay more, and even sometimes bigger, dividends.

One could also cut wages (except for the top management, of course) and lay people off to "improve productivity" at the same time and pocket even more money. One likely must fudge the numbers a bit, though, in order that Wall Street analysts not catch on to what's really going on.

Considering how many big corporations are doing that sort of thing these days, it could be just a matter of time before someone tries that again on the railroads - or is it already happening.

[Anonymous]

Assuming I had an excess of cash, I would first increase loss reserves, then review company plans for capital expenditures. If feasible I would propose advancing planned projects or, if none plan and invest in perceived weak areas by adding capacity (a new siding or interlocking for example). In the event that was not necessary I would propose a stock buyback as set forth above by others (and is actually happening with several of the Class 1s right now)

LC

[eolafan]

QUOTE: Originally posted by ajmiller

The first thing you do is go back to high school, work on your spelling and vocabulary, and maybe get your diploma.

Wow, tough critic! Well ajmiller I will certainly be watching your spelling and vocabulary in the future to learn how a perfect person posts messages.
On the subject of this thread, one must always generate more business at a greater profit level in order to pay more and bigger dividends so it is a balancing act to be sure. I would do both with a bit more emphasis on infrasctructure improvement.

[MP173]

Another option is buying back company stock on the open market. Most of the large corporations do this. It has an effect of shrinking the ownership of the company as there are less share owning the company.

Of course, it may also have the effect of offsetting the stock options which are offered and executed by the company.

Companies flush with cash have a problem (seriously). If they have too much cash on hand then the ROE is lower. This is due to the lower amount of return a company will get for cash (typically 4% to 5% today) vs a a return of 10% to 20% on equity in the form of assets, structured with debt.

Companies will determine the dividend payout ratio based on cash flow, capital expenditures and how to finance those capex. A true measure of a company's financial stature is to measure it's free cash flow which is cash flow less capex.
It is one accounting number that is not easily manipulated as cash is cash.

If I were the CEO (actually the Chairman) I would recommend that during a period of cash generating that any investment that would have a high return on investment be executed. Possibly advance any capex, if possible. With excess cash, I would increase repurchase of company stock on the market. That is much safer than increasing the dividend, which may be a stretch later on if the economic cycle dips.

ed

[PNWRMNM]

Jim,

Only if you want to be in barkruptcy court in a few years do you follow that course. If you want to give extra money to the stockholders buy back some stock. That increases EPS and avoids the increase in fixed charges generated by additional debt.

Mac

[jimrice4449]

Assuming that the banner year came as a suprise you would pay dividends and w/ the excellent performance demonstrated float a bond issue for any major capital improvements. The payments on the bonds would then be included in future budgets.

[Anonymous]

Give the Employees raises and increase the Stock Options. for the front line workers..No that would be too Karl Marx

[PNWRMNM]

As a practical matter they do both. The percentage of earnings paid out in divedends is called the "payout ratio" and is one of many things a stock analyst or sophisticated investor looks at. The ratio may vary widely year to year as earnings tend to be more volitile than dividends. Boards try to hold the per share dividends stable, even in the face of big earnings swings. This is true of almost all public companies, not just railroads.

[Anonymous]

I would say you had better do both or you won't have either.

Virlon

[edblysard]

If you have waited till the end of the fiscal year to make such decisions about money earned the last four quarters...then you don’t belong in the CEO's seat, or on the board of directors.

Such decisions, for most major companies, railroads included, are made three to five years in advance of projected start dates...the money had better been budgeted long before the end of one particular year.

Most CEOs and CFOs are making plans today...for 2010 and beyond.
They already know the projected revenue for the next four to five years and are starting in motion now plans to invest certain funds, budget for projected maintenance and line upgrades...new lines and such.

You don’t make decisions about last years revenue this year...it has already been done.

If you are a voting board member of any big company, and find such a situation, you should vote to get rid of your CEO and CFO...quickly!

Your question can not be answered without data…if you did have a banner year, and exceeded your projected earnings by a large amount…then the laws governing that particular company most likely directs portions of it to be paid out to stockholders, and directs a percent of it to be reinvested back into the company.

Ed


Ed