Norfolk is, as I’m sure you know, the owner of the railroad that derailed in Ohio. Some have faulted the company’s pursuit of profits over safety. The financial picture tends to substantiate this. A good synopsis ( from 11/22) by seeking alpha is informative.SeekingApha.
It is interesting to note the amount of cash returned to shareholders in 2121 and 2122. The total is $6.4bn, split into dividends of $1.6bn and repurchase of shares for the remaining $4.8bn. For those not familiar with how that works out, the stock repurchases do not trigger any taxable income until sold. Then taxed at capital gains rates. This is much preferred since divs are taxable in the year received. Additionally, by putting the increase through the stock price, it is possible to transfer to heirs with mnmal tax incurred. It’s the rules as they are written.
To put this into perspective, the $3bn/ year is equal to approximately 1/4 of gross revenue. Gross revenue, not profit. That’s astounding. Debt is so cool!
Now curiously, the firm borrowed an addition $1.3bn in 2122. While a minor proportion went into capital improvements, 90% of the proceeds went to share holders. This highlights another rule in place: the tax laws greatly favor debt over equity. This is problem that our fellow poster Indy has brought up in other threads. The rules encourage leverage (increased risk) over equity financing- even when the purpose is to generate returns to investors. The rules don’t look at anything related to why the loans were taken out. It is just tax arbitrage.
Meanwhile, you may recall the events wrt a rail strike last December. The government (I’m looking at you Mr. President) stepped in to force a settlement, which resulted in wage increases but ignored workers demands for safer conditions and paid sick leave. Norfolk was a major player wrt both the union demands and of safety and sick leave. The firm got what it wanted. And just a couple months later we have this shitstorm. Looks like the safety concerns were well founded.
The train that derailed hadn’t updated their brake systems despite yellow flags. They used a design engineered before the Civil War. Technology and engineering have improved a lot since then, but not at Norfolk and Southern. Too big an expense, I guess.
The problem here is the rule book. Encouraging leverage and allowing shareholder returns to go untaxed. They broke no rules as far as I know. Yet the result is less than optimal for all concerned. Be glad you don’t live in East Palatine,OH. The increase in stock price happens immediately, so anything about long term investing is pure codswallop. It’s just great tax strategy.
Is there anyway to get off this road to catastrophe? It’s financial nonsense.