Railroads and their workers play an essential role in the U.S. economy, shipping goods across the country. In 2022, railroad workers decided to strike because of poor working conditions. A strike looked imminent until the White House stepped in and forced both sides to come to an agreement last September.
By November 2022, some unions had rejected the agreement, and President Biden asked Congress to make the agreement law. It was passed by the Senate on December 1st, giving railroad workers one day of paid sick leave.
Here is what the railroad workers initially wanted, the importance of railroads in the U.S., and some railroad stocks investors can look into for a defensive play during inflationary periods.
- Railroad workers were going on strike for better working conditions.
- A strike looked inevitable until the White House helped broker a deal, but many unions rejected Biden’s tentative agreement from September 2022.
- Investors looking for a defensive play in the market should consider railroad stocks.
The Initial Strike Threat
Railroad work involves intensive labor on the part of employees. They must work in all types of weather, around dangerous equipment, managing trains, rail cars, and switches while engaging in other hazardous activities. For years, rail operators ignored the needs and demands of workers for better pay, improved working conditions, and time off for personal needs without punishment.
The main point of contention in 2022 was that railroad operators set punishing and unpredictable work schedules with little flexibility and penalized workers for taking days off they were entitled to. This included punishing them for taking time off for personal illnesses and family emergencies. The coalition for National Freight Rail Bargaining, representing 12 railroad unions, negotiated with the railway operators for almost three years and could not achieve an equitable resolution.
The White House intervened in September 2022 – at the end of the mandated cooling-off period – intending to stop rail workers from walking off the job. This would have completely crippled the railway system. The agreement addressed some of the workers’ grievances, but the most significant remaining issue was the punitive attendance policy. Railway workers were ready to walk out if companies didn’t adjust their attendance policies consisting of a points system.
The strike was averted at the last minute when an equitable alteration to the attendance system was added to the negotiations. However, several unions ended up rejecting Biden’s proposed agreement. During all this, many railway workers quit due to the lack of progress in the contract negotiations, with insufficient people available to replace them.
The irony is that many railroad companies reported large profits during the pandemic as the supply chain issues caused major shipping issues. Part of the railroads’ profit was on the demurrage fees, which the companies charge when freight remains at port for too long.
Congress Signs the Agreement Into Law
Eight days before an anticipated railroad strike, the Senate voted to pass the agreement into law, effectively averting the strike. The action was seen by many as dismissive of the workers, as it didn’t include the seven days of paid sick leave they wanted. The “Christmas catastrophe” was avoided, but railroad workers nationwide felt defeated.
A silver lining to this story is that some railroad companies have struck deals with unions recently, giving workers more days of paid sick leave. For example, CSX announced an agreement with two rail unions in February to give workers four days of paid sick leave. The same deal allowed workers to convert personal days into additional paid time off.
In March 2023, Union Pacific announced it had reached a paid sick leave agreement with eight labor unions. The deal gave workers in the eight unions four paid sick days and the ability to convert three paid leave days into paid sick days.
The Importance of Railroads in the United States
On the surface, railroads seem like an old-fashioned way of transporting goods from one place to the next and an inconvenience to drivers stuck at railway crossings. The truth is railroads are essential to efficiently getting merchandise to retailers at the lowest price point. No other form of transportation can move the same volume of goods in the same manner with the same low costs and minimal disruption to different modes of transportation. Any railroad disruption results in a massive disruption to the U.S. supply chains.
Freight trains can transport large volumes over long distances at low tonnage rates. Part of this is thanks to electro-diesel locomotives. They use less diesel fuel than their predecessors yet can draw an average of 100 rail cars across thousands of miles with one or two locomotives. It would take almost the same amount of semis to haul that amount of freight at higher costs.
Railways deliver goods to railyards across the U.S. for use in various industries. After the train reaches the railyard, the goods on the rail cars are loaded onto waiting semi-trucks that take their cargo directly to customers or intermodal locations for distribution. This system of transportation results in lower delivery costs for customers and less time spent waiting for delivery as the railroads stick to a strict timetable.
The Best Railroad Stocks to Own
Owning stock in the railroads is one of the oldest forms of investing in the U.S. Just about every railroad in existence today began by selling stock to the public, with the proceeds used to build the railways. Buying railroad stocks is a nod to that history and an excellent way to diversify your portfolio.
Railroad stocks may not be as flashy as technology stocks, but they’re stable because no matter the economy, people need certain essentials, like food. So even when the economy slows or turns negative, railroads will still be in demand.
In addition, most railroad stocks pay healthy dividends. Since these are mature companies, they don’t need to reinvest their profits into the business to grow it. So they pay their shareholders some of the profits. The following companies are solid performers with the potential to deliver solid returns over the years.
Most of CSX’s trackage is located east of the Mississippi River and has access to 70 major and minor ports on the coastlines and Great Lakes. The company owns over 20,000 miles of track and is working on improving its infrastructure to alleviate congestion in the railyards and lines. The biggest challenge CSX faces is updating tracks that are at least 100 years old, but the company has been doing an excellent job of bringing its operations up to date with compound annual growth of over 15% in recent years.
CSX is a conglomeration of many historic railroads brought together under one corporate umbrella in 1980. It’s a solid performer and returns 1.35% in dividends.
Norfolk Southern also operates east of the Mississippi and owns 19,300 miles of track across 22 states and Washington, D.C. It primarily transports raw materials, industrial products, coal, and auto parts. The company was formed in 1982 when two railroads, the Norfolk and Western Railway, and Southern Railway merged. It also owns intermodal sites that transport containers from ships to truck flatbeds and trains.
The railway operator has invested in the future of green technology through a green bond offering to reduce its carbon emissions and help customers reduce their carbon emissions. A single electro-diesel locomotive operated by Norfolk Southern can move a ton of freight a distance of 440 miles on one gallon of diesel. Norfolk Southern seeks to improve that efficiency over time and across its operations.
Union Pacific operates primarily west of the Mississippi and has 32,000 miles of track. It’s one of the oldest rail lines in the U.S., founded in 1862 as part of the First Transcontinental Railroad project. It operates hundreds of rail yards across 23 western states, delivering everything from food, ingredients, forest products, vehicles, coal, and chemicals.
In 2022, Union Pacific Railroad and Shell joined together to speed up the decarbonization of rail transportation. The companies have agreed to work together to find ways to reduce greenhouse gas emissions and become carbon neutral by 2050.
Are Railroad Stocks Immune to High Inflation?
Railroad stocks aren’t immune to inflationary pressures because they transport goods and materials for manufacturers and consumers. A slowdown in buying from any industry directly translates to a slowdown in demand for transportation. That puts pressure on profits and lowers profitability, resulting in a lower stock price in the short term.
However, railway freight is an integral part of the U.S. economy. It won’t disappear until we see significant improvements in the cost and method of transporting large amounts of materials and goods across long distances.
It’s best to look for dips below the average stock price when buying and planning to hold onto the stocks for the long term. Railways are not going away any time soon, and the nation relies on their existence. They will always be worth buying when their prices are low.
The Bottom Line
Railroads have been around for most of the U.S.’s lifetime to move goods across the country quickly and cheaply. Even with the introduction of the U.S. Interstate highway system and airplanes, railroads are still a preferred method used by many companies.
Because of this, railroad workers must remain working for the good of the economy. The averted strike in 2022 left a bitter taste in many rail workers’ mouths. Still, we’re hopeful their persistence and patience are finally paying off with companies.