$10 billion flies out the door

Posted by Fred Frailey
on Tuesday, April 21, 2015

Here’s an interesting number: $10 billion. You can buy a lot with $10 billion. Let’s see, at $3 million a pop, more than 3,000 brand new locomotives could join your fleet. At $2 million a mile, you could double track 5,000 miles of route. At $200 million each, you could build or rebuild 50 terminals. I bet you could unlock Chicago and make it purr like a happy kitten for $10 billion. Do this three years running and railroad congestion would be a thing of the past. Reliability would skyrocket. Customers who left or never arrived would be at the door. There would be a real Railroad Renaissance, not the fake one we are experiencing now. Shareholders would be gloriously rewarded.

None of these things will happen. Oh, railroads have the money; it’s there. $10 billion is what Morgan Stanley estimates that five Class I railroads will spend this year to buy back shares of their own stock. The spenders are Canadian National, $1.695 billion; Canadian Pacific, $2.533 billion; CSX, $829 million; Norfolk Southern,  $956 million, and Union Pacific, $3.905 billion.

Kansas City Southern doesn’t do share buybacks. Nor does BNSF Railway, which is a wholly owned subsidiary of conglomerate Berkshire Hathaway. It is worth noting that both BNSF and KCS will plow back significantly more of their revenues this year into capital projects (26 percent in both instances) than the other five railroads (18-20 percent).

Share buyback programs began in earnest in the 1980s. The appeal is obvious. If your shares are noticeably undervalued, what better investment is there than your own company? Buybacks may also make sense if your capital needs are low and you have no better use for the cash that piles up. And the beautiful part is this: Fewer shares divided into the same profits equal higher profits per share. Christmas every month of the year!

But for the life of me I can’t make a case for share buybacks by railroads. First of all, their shares aren’t depressed. And second, being among the most capital intensive of all businesses, railroads have an crying need for infrastructure investments—that is, if they are serious about growing bigger.

Railroad traffic peaked in 2006. We’re not back there yet. And look what a mess the railroad business is in today. It’s not just lack of investment, I admit, because so much talent and experience has left the industry or retired. I feel sorry for vice presidents of transportation; how is one man or woman supposed to train a new corps of new operations managers?

I can’t tell you how to solve the talent drought. But as for bricks and mortar, you now know where the money is, $10 billion this year alone.

I want to challenge Claude Mongeau, Hunter Harrison, Michael Ward, Wick Moorman, and Lance Fritz, chief executives of the five railroads. If any of you will write a defense of the stock buybacks you are doing this year and defend them as the highest and best use of your money, I will publish your statement verbatim on my blog. Guys, it’s your chance to shut me up.—Fred W. Frailey

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