North American railroads may no longer be a value investment because their revenues and incomes are disappearing. Business is so bad that some U.S. and Canadian rail carriers may have to stop paying dividends.

For the past two or three decades, North American freight railroads have been able to deliver steady and substantial dividends. Largely because they are the only economical means of hauling bulk materials like coal across the continent.

Revenue and Income Collapse at the Railroads

The most recent financial numbers (those from June 6, 2016) for major U.S. and Canadian rail operators; reveal a serious collapse in revenues, and indicate their present business model might no longer be sustainable. Examples of these numbers include:

• The Union Pacific Railway (NYSE: UNP); which operates transcontinental and other lines in the Western USA, saw its revenues fall by $3.01 billion (€2.72 billion) between June 2015 and June 2016. Union Pacific; which is also known as the UP, reported revenues of $23.38 billion (€21.12 billion) in mid-2015 and $20.37 billion (€18.40 billion) in summer 2016.

• During the same period the UP saw its net income drop by $781 million (€705.45 million). Falling from $5.156 billion (€5.02 billion) in mid-2015 to $4.375 billion (€3.95 billion) a year later.

• The CSX (NASDAQ: CSX); which provides freight rail service on the East Coast of the United States experienced a revenue drop of $1.46 billion (€1.31 billion). CSX reported revenues of $12.5 billion (€11.29 billion) in June 2015 – that fell to $11.04 billion (€9.97 billion) a year later.

• CSX’s net income fell by $221 million (€199.62 million) during the same period. The railroad reported a net income $1.995 billion (€1.80 billion) in June 2015 and $1.774 billion (€1.60 billion) in June 2016.

• The Norfolk Southern (NYSE: NSC); which operates railroads in the Southeastern and Midwestern United States, lost $1.06 billion (€960 million) in revenues between June 2015 and June 2016. Norfolk Southern reported $11.17 billion (€10.09 billion) in revenue in mid-2015 and $10.11 billion (€9.13 billion) in revenue a year later.

• Norfolk Southern also lost $208 million (€187.88 million) in net income during the same period. The railway had a net income of $1.831 billion (€1.65 billion) in June 2015 that dropped to $1.606 billion (€1.45 billion) a year later.

• The Kansas City Southern (NYSE: KSU); the only railroad that operates in both the United States and Mexico, saw its revenues fall by $148 million (€133.68 million). Kansas City Southern reported revenues of $2.509 billion in June 2015 and $2.361 billion (€2.13 billion) a year later.

• Interestingly Kansas City Southern’s income actually rose slightly. It reported an income of $491.70 million (€44.13 million)in June 2015; that rose to $498.8 million (€450.55 million) a year later. That made for a modest gain of $7.1 million (€6.41 million).

• The Canadian Pacific Railway (NYSE: CP); Canada’s oldest transcontinental line, saw its revenues drop by $915 million (€826.48 million). The railroad also known as the CP reported $5.769 billion (€5.21 billion) in revenues in June 2015 and $4.854 billion (€4.38 billion) a year later.

• The Canadian Pacific lost $206 million (€186.07 million) in net income over the same period. It reported a net income of $1.34 billion (€1.21 billion) in June 2015 and $1.134 billion (€1.02 billion) a year later.

• The Canadian National Railway or CN (NYSE: CNI); the CP’s competitor which also operates a line between Chicago and New Orleans in the United States, saw its revenues fall by $1.532 billion (€1.38 billion). The CN reported $10.73 billion (€9.69 billion) in revenues in June 2015 and $9.198 billion (€8.31 billion) a year later.

• The Canadian National also saw its net income fall by $9.8 million (€8.85 million). The CN reported a net income of $2.81 billion (€2.53 billion) in June 2015 that fell to $2.717 billion (€2.45 billion) a year later.

These figures should worry investors because some of these railways have very limited resources. Norfolk Southern reported a free cash flow of just $19 million (€17.16 million) and cash and short-term investments of $866 million (€782.22 million) on June 30, 2016. The Canadian National had $123.67 million (€111.71 million) in cash and short-term investments and free cash flow of $494.63 million (€446.78 million) on June 6, 2016.

The financial resources are limited because of the vast infrastructure that the railroads operate. The Union Pacific has 32,100 miles (51,660 kilometers) of track and 8,500 locomotives to maintain. The Canadian National has around 30,000 miles (48,280 kilometers) of track. Even the Kansas City Southern; considered the smallest Class 1 or major railroad in North America, operates 6,000 miles (9,600 kilometers) of track.

Dividends and Return on Equity Threatened

Despite that railroads have been paying off for investors lately. The Canadian National delivered a dividend yield of 1.64% on October 10, 2016, and a return on equity of 24.42% on June 30, 2016. Union Pacific shareholders received a dividend yield of 2.26% on October 10, 2016, and a return on equity of 21.2% on June 30, 2016. Even the Northern Southern offered investors a 2.46% dividend yield and a 13.18% return on equity on those days.

One has to wonder how long those returns and yields can last given the revenue and income collapse at the railroads. It does not seem possible for companies with such high overheads and low operating margins to continue paying out at level with revenues in freefall.

Collapse of Coal Threatens Railways’ Feature

The biggest cause of the railways’ revenue woes is something that many people would call progress, the slow death of the American coal industry.

Four of the largest coal miners; Arch Coal, Patriot Coal, Walter Energy and Alpha Natural Resources, in the United States have declared bankruptcy in recent years. Demand for coal; which is hauled almost exclusively by rail, has plummeted at home and abroad. U.S. coal exports fell by 65% between 2012 and 2016 and demand for coal for electricity generation in one of America’s largest states, Ohio fell by 49% between 2007 and 2015, the US Energy Information Agency reported.

The major use of coal in the United States is for generation of electricity. That is slowly being replaced by natural gas which creates less pollution. Natural gas also requires simpler infrastructure (it can be delivered by pipeline rather than train) which cuts long term expenses.

This means that between 50% and 65% of the shipments of a bulk commodity that railways depend upon have disappeared in less than 10 years. That decline is likely to continue for the foreseeable future, US coal production declined by 10% in 2015. To make matters worse there are no other commodities that can easily take the place of coal.

Railways are going to have to drastically restructure to deal with this situation. An example of that restructuring is consolidation which has already begun. The Canadian Pacific tried to acquire the Norfolk Southern earlier this year but backed off because of anti-trust concerns.

A likely scenario is that smaller railroads like the Kansas City Southern and the CSX will be absorbed by larger operator. Another is organizations like Berkshire Hathaway (NYSE: BRK.B); which owns one major railroad the Burlington Northern-Santa Fe, will start buying up railways. A likely target is the Kansas City Southern; which would give other operators access to Mexico.

North American railroads are no longer a value investment. Instead they are struggling to survive in a dramatically changing environment in which some of their traditional businesses are disappearing.