CSX 2.5% Yield Pays Investors To Wait For The Turnaround, Says Argus

Argus said CSX Corporation CSX's 2.5 percent dividend yield pays investors to wait for the turnaround as it raised the price target by $5 to $35, implying an upside of 20 percent over Thursday's close.

The current payout for CSX is $0.18 per quarter or $0.72 annually, for a yield of about 2.5 percent. In May 2015, the transportation company raised its quarterly dividend by 13 percent to $0.18, but the rate has remained stable since that time.

"Our dividend estimates are $0.72 for 2016 and $0.76 for 2017," analyst John Eade wrote in a note.

Eade reiterated its Buy rating on CSX saying this "well-managed company is facing difficult macroeconomic conditions, as low natural gas prices reduce demand for coal, though the environment is beginning to ease."

The analyst highlighted that the company is also making progress lifting margins toward industry-standard levels, despite taking a modest step back in the second quarter.

Powered by cost savings, CSX reported better-than-expected second quarter earnings despite 12 percent drop in revenue. On the second-quarter conference call, CSX said it expects third volume to be down in the mid- to high-single digits. For the quarter and the year, it expects lower earnings as cost savings are unable to offset the impact of reduced coal volumes.

The company bets on cost control and is now targeting close to $350 million in full-year cost savings, versus a prior forecast of $250 million.

As such, Eade cut his 2016 EPS estimate to $1.77 from $1.85 based on management's focus on cost controls, as well as the adjusted outlooks for oil, gas and coal.

"Our estimate implies a 12.5% decline for the year. We are also reducing our 2017 forecast to $1.90 from $2.00. Our five-year earnings growth rate forecast remains 8%," Eade added.

CSX shares have outperformed the market over the past quarter, rising 12 percent while the S&P 500 has gained 4 percent. Over the past year, the shares have also outperformed, rising 13 percent to the broad market's 6 percent advance.

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Posted In: Analyst ColorNewsGuidancePrice TargetReiterationAnalyst RatingsArgusJohn Eade
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