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Aurizon hauls in 16% profit growth

Queensland-based rail freight operator Aurizon (ASX: AZJ) has boosted its underlying net profit after tax by 16% to $487 million on the back of a 7% increase in total revenue and a 4% increase in coal haulage volumes.

As the owner and operator of 2,670 kilometres of rail network through Queensland that service over 30 coal mines, the company is heavily exposed to the Queensland coal industry. Some of this coal is transported by Aurizon to export terminals, while the rest is destined for domestic users such as Rio Tinto’s (ASX: RIO) Comalco Refinery. Aurizon’s expansion into Western Australia and iron ore freight has helped to diversify the company’s earnings base and was an important contributor to the higher profit result.

One of the highlights from the full year results announcement was the board’s decision to lift the dividend payout ratio from 50% to a range of 60% to 70% with a final dividend of 8.2 cents declared, up from 4.6 cents last year.

For shareholder the increased dividend pay-out ratio wasn’t the only good news. Management also confirmed that the business remained on track to deliver $230 million in cost reductions and productivity gains by June 2015 and that coal haulage volumes should increase by around 5% for financial year 2014.

On an underlying basis, earnings per share for the full year were 21.6 cents. At the last traded price of $4.57 this equates to a price-to-earnings multiple of 21.2 and a dividend yield of 2.7% (based on the most recent two dividend declared).

Foolish takeaway

Major competitor Asciano (ASX: AIO), which owns the Pacific National rail freight business, is due to report next week. Asciano is more exposed to general freight than Aurizon, however the positive commentary around coal volumes could see Asciano’s share price receive a boost.

Aurizon shareholders find themselves at a cross roads (or perhaps that should be at a cross tracks!). On the one hand Aurizon enjoys a partial monopoly, is undertaking significant cost cutting and also looking to benefit from an expansion into the Pilbara. On the other hand the company is forecasting relatively low rates of freight growth from its main coal business, its return on invested capital is only 8% and yet it is trading on a hefty multiple of over 20 times earnings.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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