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5 Dividend Raising Transports to Combat Market Uncertainties

Zacks

The U.S. equity market has been on a roller-coaster of late. In fact, Dow Jones Industrial Average shed 1,033 points or 4.2% on Feb 8. Other major bourses – the S&P 500 and the Nasdaq — also finished in the red on the same day.

In fact, this was the second time in a week that the Dow shed over 1,000 points in a day after the 1,175 points decline on Feb 5. Following the latest U.S. sell-off, both the Dow as well as the S&P 500 are officially into the correction territory, down more than 10% from the recent all-time high reached in January.

The steep sell-off was due to the stronger-than-expected job addition along with fastest wage growth in more than eight years. These factors, in turn, triggered fears of inflation and bolstered expectations that the Fed could take a more aggressive stance in hiking rates than previously expected.

Furthermore, heightened volatility on the back of a significant increase in the CBOE Volatility Index (VIX) — Wall Street’s so-called fear gauge — which currently is more than 30 (near the highest level since August 2015) indicates bearish market prospects. Notably, any reading above the 20 mark indicates bearish outlook in the equity market.


Given this backdrop, investing in companies that not only pay consistent dividends but also raise the same seem to prudent. This is because such companies are financially stable and mature, and can even generate steady cash flow irrespective of market conditions.

Transportation Stocks Riding High

A sector that boasts well-paying stocks in terms of dividends, is the one having transportation stocks. Transports have been having a good time lately after being laid low for most of 2017, due to various headwinds like back-to-back hurricanes, increased costs to name a few.

Also, the string of outperformances (in terms of earnings as well as revenues) by the key sector participants like Delta Air Lines DAL, American Airlines Group and Norfolk Southern Corp. NSC in fourth-quarter 2017 bears testimony to the improved scenario surrounding the highly-diversified Zacks Transportation sector (one of the 16 Zacks sectors).

Factors Behind the Resurgence

Railroads are one of the most important sub-groups in the transportation sector. After facing multiple challenges over the past few years due to coal-related winds, stocks in the space seem to have bounced back on improvements in the coal scenario.

Particularly with Donald Trump’s presidency, the coal industry is witnessing better days. In fact, Trump is aiming to revive the industry by relaxing regulations, which were hurting its prospects. Apart from coal, the scenario pertaining to another key source of revenues for railroads — intermodal — has improved by leaps and bounds lately.

Airlines — another important sub-group in the broader sector – are also seeing good times now, courtesy of the improved demand for air travel. For 2018, the International Air Transport Association (“IATA”) predicts global net profit of $38.4 billion for the industry. This is much higher than the profitability forecast of $34.5 billion for the current year.

Moreover, package delivery companies like FedEx FDX and United Parcel Service UPS performed well on the back of e-commerce growth in the most recent holiday season. This further highlights the optimism surrounding transports.

Trump’s Tax Overhaul — A Boon

On Dec 22, 2017, Trump signed the much-anticipated tax bill into law (Tax Cuts and Jobs Act). Under the $1.5 trillion tax overhaul package, corporate tax rates have been slashed to 21% from 35%. The significant reduction in corporate tax rate is likely to boost cash flow, which in turn will aid earnings of transportation stocks.

Apart from the significant drop in corporate tax rate, the new law allows these companies to deduct their capital expenditures from taxable income in the year of their occurrence, which was not allowed earlier. This aspect hugely favors transportation stocks as they invest substantially toward capital expenditures. As a result, their annual tax bills would be lowered significantly due to higher deductions.

For example, Delta, which expects revenues in 2018 to increase between 4% and 6% on a year-over-year basis lifted its earnings per share guidance anticipating the new tax law to boost its results. The company now expects earnings per share in the range of $6.35 to $6.70 (previous outlook: $5.35 to $5.70).

Shareholder-Friendly Activities Likely to Pick Up Pace

As noted above, many stocks in the transportation space reward shareholders through dividend payments and buybacks. For example, United Continental Holdings — a key transportation player — announced a new buyback program late last year. Moreover, the likes of Delta and Kansas City Southern hiked their quarterly dividend payouts in 2017.

Following the new tax law, we expect an increase in these shareholder-friendly activities from various transportation companies. Due to the significant reduction in their tax bills, more cash is expected to remain in the hands of these companies to fund their capital expenditures, acquisitions and share repurchases among others.

Dividend Paying Transports — A Prudent Choice

In view of the above-mentioned tailwinds, we believe that stocks from the transportation space should be in one’s portfolio. Moreover, picking dividend stocks seems prudent during uncertain times like the current scenario.

Consequently, we have zeroed in on five stocks in this high flying space, which have a strong dividend paying history. Also, these companies have raised their dividend payouts recently. All the chosen stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our first choice is, UPS, the world's largest express carrier. Markedly, UPS provides specialized transportation and logistics services in the United States and internationally. UPS’ board of directors cleared an approximately 10% hike in its quarterly dividend to 91 cents per share ($3.64 annually) on Feb 8. The first installment of the new dividend will be paid on Mar 7, 2018 to the stockholders of record on Feb 20.

The raised dividend highlights UPS’ commitment to create value for shareholders and underscores the company’s strong financial condition as well as bright prospects, going forward.

Also, it has an impressive record with respect to dividends. The company has been rewarding shareholders with cash dividends regularly since 1969 and has more than quadrupled its dividend payout since it went public in 1999.

Furthermore, the company’s Momentum Score of A highlights its short-term attractiveness. Notably, the Zacks Momentum Style Score indicates when the timing is right to grab a stock and make the most of its momentum.

Our next choice is Union Pacific Corp. UNP, which provides rail transportation services across 23 states in the United States through its principal operating company, Union Pacific Railroad Company.

On Feb 8, this railroad operator’s board of directors a 10% hike in its quarterly dividend payout to 73 cents per share (annualized $2.92 per share). The first installment of the raised dividend will be paid on Mar 30, 2018 to shareholders as of Feb 28.

In fact, this is the company’s second dividend hike in three months. In November 2017, the company had announced a 10% hike in its quarterly dividend payout to 66.5 cents per share. We believe that two dividend hikes in such a short span reflect the increased financial prosperity following the introduction of the new tax law.

Additionally, the company has an impressive dividend history having rewarded shareholders through dividends for 119 consecutive years.

The next member in our list is also a railroad operator — Norfolk Southern. Last month, the company's board of directors increased its quarterly dividend to 72 cents per share (annualized $2.88 per share) from 61 cents per share (annualized $2.44 per share). The first instalment of the new dividend is payable Mar 10, 2018 to shareholders of record on Feb 2.

Moreover, it has an impressive record with respect to dividends. The company has paid dividends for 142 consecutive quarters, since inception in 1982.

GATX Corporation GATX is our next choice. This leading global railcar lessor specializes in railcar and locomotive operating leasing, aircraft operating leasing, information technology leasing, and venture finance for customers in diverse industrial sectors worldwide.

On Jan 26, 2018, the company’s board of directors cleared a 5% hike in its quarterly dividend to 44 cents per share ($1.76 annually). The first instalment of the new dividend is payable Mar 31, 2018 to shareholders of record on Mar 5.

Also, it has an impressive record with respect to dividends. It has been paying dividends regularly since 1919. Furthermore, the company’s Momentum Score of B highlights its short-term attractiveness.

The final member in our list is trucking company J.B. Hunt Transport Services JBHT. On Jan 24, 2018, the company’s board of directors cleared an approximately 4.3% hike in its quarterly dividend to 24 cents per share (96 cents annually). The first installment of the new dividend is payable Feb 23, 2018 to shareholders of record on Feb 9.

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