Only Canadian National, with a $1.7 billion budget, and
Kansas City Southern, which didn’t disclose a specific dollar amount but said CapEx would total 17. 5 percent of its
2011 annual revenue, have rolled out spending plans that
are virtually unchanged from their 2010 levels.
ON A GROWTH TRACK
What’s driving the strong numbers? One factor is favorable
tax policy. Language in the U.S. tax bill signed into law in
December accelerated the depreciation timetables for capital investments, giving railroads a major incentive to deploy
capital. In addition, the railroads have virtually no problems accessing the capital and debt markets, as the value of
their assets is well understood and recognized by the lending community.
But the principal driver is the general health of the rail
industry. Car loadings and intermodal traffic are growing at
a brisk pace above strong comparable figures in early 2010,
although volumes are not near the levels seen in 2006, the
year before the rail freight recession began. In addition, the
railroads have been flexing their muscle on pricing and are
seeing improved operating margins as a result. The carriers
show no signs of easing off the pricing throttle—much to
the chagrin of shippers but to the delight of shareholders.
A look at Union Pacific’s cash flow performance speaks to
the industry’s momentum. According to an analysis by
investment firm Robert W. Baird & Co., the railroad generated free cash flow (FCF) of $1.6 billion in 2010, compared
with $1 billion in 2010. FCF in the fourth quarter alone was
$590 million.
For 2011, Baird projects UP will generate $1.9 billion in
FCF, despite the $700 million increase in capital expenditures. In addition, Baird expects UP to return $700 million
to shareholders through dividends and share repurchases;
during 2010, UP repurchased 16. 6 million shares and
increased its dividend roughly 40 percent, for a total payout
of $600 million.
Traditionally, the railroads spend about 80 percent of free
cash flow on capital expenditures. In absolute terms, the
percentage may dip to 70 percent or so in the next few years.
However, as free cash flow continues to grow, so will the
funds allocated to CapEx. That’s why experts like Tony
Hatch, a veteran transportation analyst who now runs his
own consulting firm, believe the cash flow projections will
easily support increased capital investment while at the
same time rewarding shareholders through share repurchases and dividend hikes.
—M.S.
With you when
the road ahead has detours
Securing a new customer, obtaining unexpected large requests for service,
and supporting an increase in operational expenses all change the scope of
your financing needs. The professionals on the Transportation Services team
at Wells Fargo Capital Finance are dedicated to your success and can help
you address unexpected challenges. For financing to navigate the detours,
contact us; we can help.
Wells Fargo Capital Finance
Jeffrey Duclow • 972-387-6515 • jeffrey.e.duclow@wellsfargo.com
wellsfargocapitalfinance.com/dcvelocity
© 2011 Wells Fargo Capital Finance. All rights reserved. Wells Fargo Capital Finance is the trade name for certain asset-based lending, accounts receivable and purchase order finance
services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Business Credit, a division of Wells Fargo Bank, N.A.
