CSX, the railroad giant, launched a series of moves designed to boost shareholder returns. Included are a share repurchase program, a dividend boost, and an increase in capital investments.
The company will repurchase $1 billion in stock, for a total current program of $3 billion. That works out to 15 percent of the company’s total market capitalization.
Combined with its prior stock repurchase program, CSX expects to have repurchased a total of $3.5 billion of outstanding shares over the three-year period ending in December of 2008.
Starting in September, the company will increase its quarterly dividend by 25 percent. CSX also said it would increase its planned capital investments to “accelerate improvements in the safety, service reliability, and capacity of its transportation businesses.”
Michael Ward, chairman, president and CEO of CSX said the company CSX can support these steps with higher cash flows and added leverage after having doubled its core earning power over the last three years. “We remain committed to driving shareholder value through earnings growth and a balanced approach that includes stock buybacks, dividend increases, and long-term investments that also benefit our customers, employees, and the national economy,” said, in a press release.
In response to the announcement, Standard &Poor’s lowered the long-term corporate credit ratings of CSX and CSX Transportation Inc. by one notch, to investment grade BBB- from BBB.
“CSX’s increased, debt-financed share repurchase program indicated a somewhat more aggressive financial policy, and contrasts with a focus on debt reduction in prior years,” said Lisa Jenkins, a Standard & Poor’s credit analyst, in a press release. “The cumulative $3 billion share buyback program is equal to about one-third of CSX’s book equity and will depress credit measures somewhat.”
CSX’s moves to satisfy shareholders may be a response to a report that activist shareholders are eyeing the railroad operator. In mid-April, CSX disclosed that The Children’s Investment Fund Management LLP, a UK-based activist hedge fund run by Christopher Hohn, notified the railroad company that it had made a filing under the Hart-Scott-Rodino Antitrust Improvements Act to acquire more than $500 million of CSX stock.
“That firm has also advised CSX that it currently holds a significant economic position through common stock ownership and derivative contracts tied to the value of CSX stock,” CSX stated then, adding that it is voluntarily furnishing this information.
CNBC also recently reported that Warren Buffett’s Berkshire Hathaway has invested in three railroads. It became the largest shareholder in Burlington Northern Santa Fe. Buffett told the television station that Berkshire invested about $700 million in another, unnamed North American railroad and slightly less than that in a third railroad.