How Will CSX Plan To Return Value To Its Shareholders?

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CSX Corporation (NASDAQ:CSX), the Florida-based railroad company, has experienced a drop in its profitability as well as cash flows over the last few years due to the declining shipments in the coal and commodities markets. However, the reverse of these trends in 2017 enabled the company’s earnings to rebound. These trends are expected to continue to persist in the coming years, which will boost CSX’s earnings. This, coupled with the recent tax cuts by the US government, are likely to have a positive impact on the company’s free cash flows. Further, the company plans to restrict its capital spending in the next 2-3 years in order to return higher value to its shareholders. Below, we present how CSX’s Free Cash Flows are expected to rise in 2018 and beyond, backed by its improving profitability and restricted capital investment using our interactive platform. Higher cash flows will enable the company to return greater value to its shareholders.

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Reduced Operating Costs Will Drive Profits

CSX has been rationalizing its work force, improving fuel efficiency through longer train lengths, and reducing its support costs in order to bring down its operating ratio (operating expenses as a percentage of total revenue). Given the impressive results from these cost reduction initiatives, the company delivered productivity gains of $460 million in 2017, which reduced its operating ratio to 67.9%, 100 basis points lower than the prior year. Going forward, CSX expects to further reduce its operating ratio to under 65% over the next few years. We anticipate that the company will be able to achieve its targeted operating ratio, which will boost its profitability in the near term.

Lower Corporate Tax Rate To Further Boost Profitability

The implementation of the US Tax Cuts And Jobs Act of 2017 has led to the reduction of corporate tax rate from 35% to 21%, effective from 2018. Consequently, CSX made adjustments to its deferred tax assets and realized tax benefits of $2.3 billion in 4Q’17, which resulted in a negative tax rate for full year 2017. However, in its latest presentation, the company expects its effective tax rate for 2018 to be around 25%. This is significantly lower than its effective tax rate of 37% (average) in the previous years. Hence, we expect to witness a jump in the company’s profits as well as cash flows in 2018 and beyond.

Restricted Capital Will Augment FCF Growth

Apart from improving its profitability, CSX plans to restrict its capital spending by improving its asset utilization and refined network approach. Accordingly, the company aims to spend around $1.6 billion in 2018 to maintain and sustain its existing infrastructure. We expect this trend to continue in the next few years, allowing the company to utilize its higher cash flows to return greater value to its shareholders.

Do not agree with our forecast? Create your own forecasts for CSX Corp. and its revenue streams using our interactive platform.

 

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