Despite the evolution and advancements in the global economy and infrastructure, one thing remains constant. People and things need to get from point A to point B. Transportation remains at the core of business and industry, but it’s also an area of the market that is very economically sensitive. Transportation companies are impacted by lulls in economic activity, changes in fuel prices and even the weather.
In this piece, we’ll look at each of the major sectors within the transportation industry, examine the strengths and weaknesses of each group and take a deeper look at one of the major players within the sector.
The railroad, despite being one of the nation’s oldest methods of transportation, is still one of the most popular when it comes to commodities and fuels. The majority of the nation’s coal is transported by rail along with several other chemicals, grains and other materials. The railroad industry accounts for nearly $300 billion in total market cap, with most of that belonging to the largest five companies.
Since railroads indirectly reflect the demand for goods from consumers and businesses, they are an economically sensitive area. Railroads tend to do well when the economy is strong and fuel prices are low. Higher demand for products that need to be shipped helps drive revenues. Low fuel prices help lower operating costs which, in turn, help improve balance sheets and dividend strength.
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Conversely, railroads tend to struggle in times of economic weakness. The railroads also could be negatively impacted by the continued development of alternative clean energies. The slow decline of the coal industry could eliminate a significant revenue source from the industry.
Union Pacific Corporation (UNP ) is the largest railroad by market cap and has been in business for more than 150 years. The company has a history of growing its dividend consistently, lifting the quarterly dividend from $0.05 in 2002 to $0.60 in 2016. Due to the cyclical nature of the business, Union Pacific has historically kept its payout ratio in the range of about 25% to 45%. This allows the company the ability to maintain its financial flexibility while rewarding shareholders. The company is well-diversified with six different subsidiaries driving the company’s revenue. That diversification, with strength in its agricultural and chemical divisions, provides some protection against weakness in the coal and industrial sectors.
Get Union Pacific’s complete dividend history here.
The airline industry has been one of the cornerstones of the transportation system for both passengers and cargo. Individual airlines, however, have historically had trouble remaining profitable thanks to a variety of factors such as fuel expenses, labor costs and competitive pressures. Demand has not been an issue lately as load factors, a measure of how many passenger seats are filled, remain high. The airline industry has a total of nearly $200 billion in total market cap, a number that is split between the major airlines, such as American Airlines (AAL ), and the smaller regional airlines, such as Alaska Air Group (ALK ).
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Like the railroads, airlines are impacted by fuel prices but their primary cost of operating is unionized labor. Labor strife and the potential of a strike can deeply affect the bottom line if flights need to be canceled or contracts renegotiated. Weather also can be a factor if storms force the cancellation of routes.
Delta Airlines (DAL ) is the largest airline by both market cap and number of passengers served. The company has traditionally maintained one of the higher dividend yields within the airline sector but one of the lower payout ratios. Cyclicality has prevented many airlines from committing too heavily in their quarterly dividends as evidenced by Delta’s historical payout ratio in the range of 10% to 20%. Since the financial crisis, however, Delta has generated more than enough net income and free cash flow to support the current dividend.
Get Delta Airlines’ complete dividend history here.
The trucking industry is responsible for the majority of freight moved across the country including raw materials, food products, retail goods and manufactured items. The trucking group has a total market cap of nearly $40 billion with one-half of that coming from two major players, J.B. Hunt Transport Services (JBHT ) and Old Dominion Freight Line (ODFL ).
The trucking industry experienced a recessionary environment recently as it was impacted by weakness in both the industrial and energy sectors. Conditions have begun to improve due to enhanced pricing power, improved economic conditions and increased transport demand. One of the sector’s biggest headwinds is its driver shortage. The American Trucking Association expects a current deficit of 48,000 qualified drivers. If the shortage trends continue, that number could triple over the next several years.
Get J.B. Hunt’s complete dividend history here.
J.B. Hunt Transport Services is the biggest player in the trucking space. The stock has been a slow but steady dividend grower since 2004. While the dividend yield has historically remained below that of the S&P 500, it’s been secure. The payout ratio generally remains in the 15 to 25% range and has rarely risen above 40%. J.B. Hunt will always be prone to slowdowns in the economy and sensitive to spot pricing weakness.but its diversified operation will help shield it against vulnerability in any one area of the market.
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Air Freight Delivery
Where trucking and rail can handle deliveries within relatively shorter distances, air delivery can facilitate farther and faster shipments. The air freight delivery industry can now handle shipments virtually anywhere in the continental U.S. within the same day and around the globe within a couple of days. Air freight and delivery businesses comprise roughly $170 billion in the market, but most of that belongs to two shipping giants, United Parcel Service (UPS ) and FedEx (FDX ).
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While the air freight industry tends to thrive in a strong economic environment since the demand for shipped goods increases, it’s faced with two significant headwinds. The first is the prevalence of free shipping. Much of the cost of free shipping gets passed on to the consumer but it keeps shipping companies searching for lower cost and faster solutions. The second is Amazon (AMZN ). The retail giant is developing its own shipping solution which could redirect a significant portion of revenues away from the existing players.
UPS is the world’s largest package delivery company transporting more than 2 million packages via air in the U.S. every day. While UPS continues to deliver record annual revenues, weakness in industrial production has negatively impacted revenue per package despite gains in package volume. The stock has been popular among dividend seekers due to its historically generous yield, but its typical payout ratio in the 50% to 60% range suggests the company isn’t overextending itself.
Get UPS’s complete dividend history here.
The Bottom Line
Transportation companies are staples of the global economy. There is always demand for freight delivery, although it’s susceptible to strengths and weaknesses in the economy. The cash-intensive nature of their businesses makes them solid choices for income seekers looking for sturdy and growing dividends.
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