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Stock to watch: CSX is a bargain railway with a rising dividend

A CSX freight train passes through Folkston, Ga.

OSCAR SOSA/Associated Press

CSX Corp.

Last close: $24.30 (U.S.)

52-week trading range: $18.87 to $24.33 a share

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Annual dividend: 56 cents a share for a yield of 2.3 per cent

Analysts' ratings: There were 18 buys, 14 holds and no sells, according to Bloomberg data. Target prices range from $21 share estimated by Sanford C. Bernstein analyst David Vernon to $29 a share by Jefferies analyst Peter Nesvold.

Recent history: Shares of the Jacksonville, Fla.-based railway chugged to a 52-peak on Wednesday after tumbling last fall on declining coal shipments. The slump in coal deliveries, which represents 20 per cent of volumes, has stemmed largely from utilities switching to cheaper natural gas to generate electricity. CSX, the biggest eastern U.S. railroad operator, carries thermal coal headed for utilities, and metallurgical coal ultimately destined for Europe and Asia. When CSX reported fourth-quarter results in January, falling coal volumes took a bite from earnings, but cost-cutting and rising shipments of other kinds of freight helped mitigate declines. A new and growing trend has been the shipping of crude oil because of a lack of pipeline capacity. CSX stock has gained about 13 per cent (including dividends) over the past year.

Manager insight: CSX is a compelling play on a U.S. economic recovery, and can also provide income as it keeps increasing its dividend, says Michael Simpson, a portfolio manager with Toronto-based Sentry Investments, and who bought the railway's shares two months ago.

When CSX holds its shareholders meeting in May, "we think that we will get a dividend increase of between 5 and 9 per cent, and further share buybacks," he said. "Railroads have got to invest, but they can still raise it [payout] modestly in the context of improving earnings and cash...They have increased their dividend over the past five years. It has a compounded dividend growth rate of 24.6 per cent."

He is not too fussed about the CSX's falling coal shipments. "We see coal declining, but it is de-accelerating," he said. "What is positive lately is that natural gas prices in the United States have been that is making coal more attractive to power plants...But the majority of the switching [by power plants] has taken place." There will still be demand for coal in Asia and Europe where certain nuclear reactors are being shut down, he added. The need for "met" coal to make steel is stronger in Asia than it is in Europe, but "as the economy recovers, then Europe is eventually going to come back and their steel mills will need coal as well," he said.

CSX's shares are also a bargain compared with some peers, he noted. "We think CSX is trading at about 11.7 times earnings compared with peers like Canadian Pacific that trades at 17.3 times 2014 earnings," he said. "We also own Canadian National Railway. We think CN is the premier company, and is trading at about 14 times earnings, but we could get CSX cheaper. In two years, we think it [CSX] could get to $27 a share."

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