Norfolk Southern's Train Derailment Unlikely to Impact Dividend Policy, Long-Term Outlook

Norfolk Southern, a major freight railroad with over 19,000 route miles spanning 22 states, earlier this month experienced a train derailment in rural Ohio.

There were no fatalities or injuries, but some of the railroad cars carried hazardous chemicals, and a fire ensured when the train went off the tracks.

Many families and businesses in a nearby village of approximately 5,000 residents were ordered to evacuate the area for several days until regulators confirmed the air and water were safe.

Despite facing potential cleanup liabilities and lawsuits, Norfolk Southern appears likely to remain financially sound and continue growing its dividend, which has been paid without interruption for over 20 consecutive years.

Norfolk Southern purchases insurance covering legal liabilities for bodily injury and property damage to third parties. Prior to this month's train derailment, the firm had coverage for liabilities above $75 million and below $800 million.

Given the scope of this accident, the nearby town's relatively small size, and evidence indicating that the toxic chemicals onboard did not spread very far, this level of coverage seems adequate to shield Norfolk Southern from most of the financial impact.

For comparison, in 2005 a Norfolk Southern train crashed in South Carolina, killing nine people and requiring over 200 to be treated for toxic chlorine exposure.

Excluding a settlement for an undisclosed sum with an impacted business in the area, Norfolk Southern disclosed around $60 million of expenses related to this incident, with insurance covering the rest.

Assuming a similar outcome, BBB+ rated Norfolk Southern generates an average of $2.5 billion of free cash flow annually and retains around half of that amount after paying dividends, leaving ample firepower available to absorb most realistic liability outcomes from this derailment.

Regulators could push harder for increased safety rules, such as requiring upgraded brakes on trains carrying flammable liquids. But it's hard to imagine any increased capital costs to outfit certain trains being severe enough to materially impact Norfolk Southern's financial profile.

Over 1,000 derailments take place across the nation annually, so this event on its own may not serve as a major catalyst for train safety reform either.

Overall, Norfolk Southern's accident dings the firm's reputation but seems unlikely to alter its dividend profile, entrenched duopoly position, or long-term outlook.

We will continue monitoring developments related to Norfolk Southern's train derailment and provide updates as needed.