Dividend investing is not only about yields, ratios and payments. It’s very important to analyze the business behind the numbers, its competitive strength and the fundamentals that generate and sustain the cash flows for those dividend payments. For investors in the hunt for rock solid dividend companies, natural monopolies can be a smart alternative.
I some business areas, it just doesn’t make sense to have more than one player from a business perspective. These are industries in which the business opportunity is attractive when there is one company exploiting it, but increased competition would ruin it for everyone. Think about airports, some utilities or railroads for example — there wouldn’t be enough demand for two companies covering the same market.
Full Steam Ahead
Norfolk Southern Corp. (NYSE:NSC) operates 21,000 miles of track in 22 eastern states, the District of Columbia and the province of Ontario, Canada. Norfolk Southern Corp. (NYSE:NSC) is a big player in coal transport, which represents nearly 30% of revenue, and the company has also been increasing its presence in businesses like auto parts and intermodal transportation over the last years.
Nobody in their right mind would think of building another railroad in the same territory that the company covers, the costs would be enormous and splitting the demand in two would probably mean that both players would lose money. Trains still compete against trucks, but the railroads have a structural cost advantage that is determinant when it comes to transporting commodities like coal.
Norfolk Southern Corp. (NYSE:NSC) is a well-managed company with solid profitability ratios, and a healthy cash flow generation track record. The company pays a 2.7% dividend yield, and it has been able to consistently increase its dividend payments over the last years.
Turning Trash into Energy
Waste Management, Inc. (NYSE:WM) owns a leadership position in the stable and profitable business of waste collection with 271 active landfills and 294 transfer stations in the US. Most people don’t like to have landfills near their home, so it’s especially complicated to the required permissions to open new landfills. This means that Waste Management, Inc. (NYSE:WM), which already owns the landfills, has in its hands in a dirty but very valuable asset.
In case these this sounds too boring and unglamorous, the company is expanding rapidly into recycling. Waste Management, Inc. (NYSE:WM) owns 22 plants that turn trash into renewable energy, and it has been acquiring smaller players in the recycling business in order to increase volume and profitability in this segment.