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Riding Norfolk Southern to Value

Norfolk Southern: Historical Earnings, Price, Dividends and Normal P/E Since 2001

Performance Table

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 15.1% annualized ROR (w/o dividend) (green circle), long-term shareholders of Norfolk Southern, assuming an initial investment of $10,000, would have received an additional $8,533.26 in total dividends paid (blue highlighting) that increased their annualized ROR (w/o dividend) from 15.1% to a total annualized ROR plus dividends paid of 16.4% compared with 2.6% in the S&P 500.

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 2001.

A further indication of valuation can be seen by examining a company's current P/S ratio relative to its historical P/S ratio. The current P/S ratio for Norfolk Southern is 2.15, which is historically normal.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company's earnings.

2. The price or valuation you pay to buy those earnings.

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 30 leading analysts reporting to Capital IQ forecast NSC's long-term earnings growth at 11%. NSC has medium long-term debt at 47% of capital. The railroad is currently trading at a P/E of 13.7, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18.
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