Monopoly Madness in the U.S. Railroad Industry

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The freight railroad industry in the U.S. is highly concentrated with a handful of full of firms dominating the market. With the passage of the Staggers Rail Act of 1980 which deregulated the industry and sparked an era of mergers and acquisitions, the number of Class I railroads dramatically shrank from over 30 to just four. Contrary to the teachings of the free-market capitalism, U.S. Federal regulators and politicians seem to believe in the “four is few and six is many” phrase with respect to one of the main modes of freight transportation in the country.

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Source: Bulk Commodities and the Rails: Still Crazy after all these years, Dr. Mark Cooper, Consumer Federation of America

The five Class I US-based freight railroads operating in the country are:

  1. BNSF Railway
  2. CSX Transportation (CSX)
  3. Norfolk Southern Railway (NSC)
  4. Kansas City Southern Railway (KSU)
  5. Union Pacific Railroad (UNP)

Kansas City Southern Railway (KSU) is the smallest of the Class I railroads and operates in ten central U.S. states and Mexico with about 6000 miles of track under its control.

Update (5/29/22): Kansas City Southern was bought out by Canadian Pacific (CP) in Dec, 2021.

The railroad industry can be considered as a oligopoly and for many captive shippers it is actually a monopoly since they are serviced by only one railroad. For example, two-thirds of coal shipped by rail is captive to a single railroad. With over 90% of rail traffic shared among the four rail carriers and healthy competition mostly eliminated, railroads enjoy enormous pricing power.

From an investment standpoint, U.S. railroads offer an excellent opportunity for long-term investment. Among the five US-based Class I railroads, BNSF Railway is privately owned as Warren Buffet’s Berkshire Hathaway bought the company in 2009.

The following chart shows 5-year return of the other three railroads as of May 29, 2022:

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Source: Yahoo Finance

Disclosure: Long NSC, UNP and CSX

Update (5/29/22):

1.The Largest US Railroad Companies:

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Source: How America’s Supply Chains Got Railroaded, The American Prospect

2. The 5 Biggest Railroads in North America:

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Source: SoundingMaps.com

3. US Railroad lines by Ownership:

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Source: Unknown

Five NYSE-Listed Latin American Stocks Yielding More Than 5% Dividends

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Some investors have the misconception that one should invest in emerging stocks mainly for capital appreciation. However that need not be the case. Many emerging market stocks pay above average dividends and hence they are attractive for both capital growth and dividend income.

According to FT market data, the S&P 500 has a dividend yield of 2.6% as of Jan 4, 2012. Some emerging Latin American markets have higher yields as noted below:

Argentina = 6.9%
Colombia = 3.1%
Peru = 5.1%
Brazil = 4.1%
Chile = 2.8%

Five Latin American ADRs currently paying more than 5% dividends are listed below for further research:

1.Company:Administradora de Fondos de Pensiones Provida SA (PVD)
Current Dividend Yield: 9.64%
Sector: Investment Services
Country: Chile

2.Company: Cpfl Energia SA (CPL)
Current Dividend Yield: 5.25%
Sector: Electric Utilities
Country: Brazil

3.Company:YPF Sociedad Anonima (YPF)
Current Dividend Yield: 9.15%
Sector: Integrated Oil & Gas
Country: Argentina

4.Company: Telefonos de Mexico SAB de CV (TMX)
Current Dividend Yield: 5.62%
Sector: Telecom
Country: Mexico

5.Company:Telefonica Brasil SA (VIV)
Current Dividend Yield: 13.33%
Sector: Telecom
Country: Brazil

Note: Dividend yields noted are as of Jan 9, 2012.

Disclosure: No Positions

Why Bonds Are Important in a Portfolio

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A well diversified portfolio should hold many types of asset classes such as stocks, bonds, real estate, gold, bank deposits, etc. Bonds are particularly important to a portfolio that is heavy in stocks. This is because bonds can help smoothen the portfolio performance when stocks become extremely volatile or perform poorly in year.

The chart below shows the performance of the S&P 500 and Treasury and Corporate bonds from 2000 thru 2010:

Source:  Seeking shelter? Consider bonds, Fidelity Investments

The low correlation between stocks and bonds is evident in the above chart.

The importance of holding bonds are highlighted by the following facts. In 2008, while the S&P 500 fell 37% treasury bonds gained about 14% as investors sought shelter in the government bonds. Similarly in the past five years before 2011, the S&P 500 had a positive return of less than 1% whereas the average taxable bond fund yielded a 4% return during the same period.

Related ETFs:

SPDR S&P 500 Fund (SPY)
iShares Lehman Aggregate Fund (AGG)
iShares Barclays 10-20 Year Treasury Bond Fund (TLH)

Disclosure: No Positions

The Top 20 DR Programs by Investment Value in 2011

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The following chart shows the top 20 Depository Receipts (DR) programs in 2011:

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Source: Depository Receipts Year in Review 2011, J.P. Morgan

About half of the companies in this list are in the oil&gas and mining industries. British telecom firm Vodafone(VOD), French oil major Total (TOT),  and Russian oil company Lukoil (LUKOY) current have dividend yields of over 5%.

Disclosure: Long BBD, PBR, ITUB

The 10 Most Traded ADRs on the NYSE, NASDAQ and OTC in 2011

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U.S. investors’ interest in foreign stocks is increasing every year. To cater to this demand and to raise capital, foreign companies are increasingly listing their stocks on the major U.S. exchanges or on the OTC markets. According to a report by JP Morgan, DR trading volume hit a record high increasing 16% to 160 billion DRs in the first 11 months of 2011. The dollar value of the traded DRs rose by 12% from the previous year to $3.6 Trillion in the same period.

The graphic below shows the most traded ADRs on the NYSE, NASDAQ and OTC in the first 11 months of 2011:

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Source: Depository Receipts Year in Review 2011, J.P. Morgan

Nokia(NOK) was the most traded ADR on the NYSE. Brazilian ADRs were heavily traded on the NYSE with Vale (VALE), Petrobras (PBR), Itau Unibanco(ITUB), Banco Bradesco (BBD) and Gerdau (GGB) among the top 10. Hong Kong-based casino operator Melco Crown Entertainment (MPEL) was the top traded foreign stock on the NASDAQ. Among the highly traded ADRs on the OTC market, Swiss consumer goods giant Nestle (NSRGY) and drug maker Roche (RHHBY) can be considered for long-term investment.

Disclosure: Long BBD, ITUB, PBR