Norfolk & Southern: a case study in enhancing shareholder returns

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.


Whoah, OP is predicting business 99 years in the future.

It isn’t just laws that encourage debt over equity. According to my SOA Course 2 textbook, selling equity sends a signal that the company is in dire straits and needs a bail-out, whereas borrowing sends a signal the firm has great prospects and just needs more cash to achieve it. Consequently, firms prefer debt over equity regardless of their circumstances, due to the self-fulfilling belief that selling more stock will cause the stock price to tank.

And yet… Norfolk most certainly did not use the loan to invest in their future growth. That’s plain as day once you read the sources and uses. Basic, basic financial analysis. So what does your text book say about the obvious tax arbitrage?

…dividends are taxed as current income…figure a max of 37%. Unrealized gains rate is 0%, and with some skilled lawyering, your heirs may never have to pat tax at all.


Is that “The Bridge” textbook?

Decades of Republican tax policy and then a Democratic President who could not politically afford a rail workers strike and we the people get s*** on again.

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It’s Principles of Corporate Finance by Brealey and Myers.

I don’t know the answer to EimonGnome’s question, and I don’t care enough to re-read the textbook. Assume whatever EimonGnome says is right.

I was thinking of the “Higgins” book, each edition of which has a bridge on the cover.

Analysis for Financial Management. It was the one thing I learned from that book, regarding borrowing versus equity sale. But, that’s only theory, assuming a normal level of greed of all participants.

I hope I didn’t come off as disparaging wrt the Finance text. Those kind of things, where fundamentals intersect policy choices are tricky. When the policies change, different aspects can come to the fore.
I don’t know when that text was written. And to write a text that spans policies ( good in US, Canada, the EU.) it’s hard enough to make it worth a read.

I must have been involved in the creation of hundreds of Special Purose Vehicles, SPV - and raised billions of capital to fund them. They are super, super good at limiting liability while reducing tax burdens. Make the SPV bankruptcy remote, find something the where the tax code and GAAP differ, and we have a “go”. Make the income stream even remotely stable, and we get to add Tranche’s of debt and pop those corks. Fees are great and you get to keep the residual.

So my purpose in the OP was to identify a simply crazy tax situation. Railroads offer a transparent view into that. We all know the US rail network is a joke. That infrastructure isn’t worth maintaining. So the finance problem is how to extract max after tax value and provide some liquidity. Stock repurchases are good ways to advance that goal. Fewer seats at the table.

But the societal ramifications can be overlooked. The amount of total debt is greater than the total value of real assets. This is a fragile system. It will require periodic bailouts. We hand out credit cards like after dinner mints. This can’t end well. Taking out debt to avoid taxation is of no real value. You’re not building anything.

I’m ignorant of train operations, but am interested in learning more. My grandfather worked on the railroad.

The point I am interested in, is that the train was passing sensors indicating that the temperature of a bearing was increasing thusly:

Temp Distance
1 38 0
2 103 11
3 253 19

At the first sensor, the temperature was +38 degrees over the ambient temperature. The second sensor was 11 miles after that, and it was +103 degrees over the ambient temperature. After they passed the third sensor 19 miles later, they started to stop the train since the temperature went over their safety threshold of +170 degrees.

Now looking at the data, it seems obvious to me that after the second sensor that the temperature may have kept increasing, and that they should have started slowing sooner before the third sensor.

IANAC (I am not a conductor)


The only temperature that matters is when the alarm goes off.

Thanks for the link. The amount of bullshit out there about the event was tough to wade through.

This sentence is tough to interpret. “Once the crew had stopped the train, operators saw fire and smoke and alerted authorities of a possible derailment. Responders arrived soon after.” So the crew didn’t know the train derailed until it the engine was stopped? Could be, I don’t drive trains.

I’ll leave the hotbox monitors and brakes to the engineers and designers. Two safety procedures that jump out at me (I use to write/edit safety procedures) are:

  1. As soon as an alarm goes off a call should go out to some sort of dispatch/911 operator, could easily be a national center. That operator then will monitor the situation and be prepared to activate local emergency response when needed.
  2. Every train car can be chipped and tracked, if they aren’t already for profit/cost reasons. The manifests should be with the train, the station it left, and the station it’s going to. The dispatcher from above then can have the manifest available for the local response before they get to the scene.
  3. Plastic fire diamonds melting is morbidly amusing. yeah, that has to change.