Is Canadian National Railway Company a Smart Income Play?

Thanks to an industry-leading operating ratio and growing cash flow, Canadian National Railway Company (TSX:CNR)(NYSE:CNI) could make for a great income stock.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Dividend investments are one of the greatest ways to grow your portfolio. Taking the cash flow and then reinvesting it in more shares of the company, or in other assets, allows for significantly compounded growth. At first glance, Canadian National Railway Company (TSX:CNR)(NYSE:CNI) doesn’t appear to be a great dividend stock, primarily because it only pays a 1.72% yield; however, if we look a little deeper, the possibilities become more clear.

Part of the reason a company is able to pay a dividend is because of its economic moat. The wider the moat, the more difficult it is for competing firms to take over market share. Railroads have incredibly wide moats because of the costs associated with launching a new line. Because it doesn’t have to be too concerned with competition, it can reallocate those funds to expansion, optimization, or rewarding investors.

But that’s only the start for Canadian National Railway.

Back in January, Canadian National Railway released its full-year financial results. Results were consistent and, in some cases, quite surprising. Revenues for the year dropped by 5% to $12 billion, which would leave any investor concerned if that wasn’t coupled with a 3% increase to net income to $3.64 billion. The company brought in less business, but simultaneously, it became more profitable. And along with that, its free cash flow grew from $2.37 billion to $2.52 billion.

A big reason for this increase in net income, despite a drop in revenue, is because of the 2.3% improvement to the operating ratio. I have remained bullish on Canadian National Railway because of the operating ratio, which, at the end of 2016, was at a record 55.9%. For those that aren’t aware, the operating ratio is the amount of money that must be spent for every one dollar of revenue. The lower this goes, the higher the margin.

What’s significant is that of all the major railroads in North America, Canadian National Railway has the best operating ratio. It improved its gross tonne miles per train mile, increased the number of cars per yard-switching hour, and increased the speed of the train by an entire mile per hour. It might not seem significant, but these add up.

To reward investors for its growth, management increased the divided by 10%. For 17 straight years, management has increased the dividend, which goes to show that management’s interests are aligned with investors’. Between 2015 and 2016, management bought back shares, reducing the number from 805.1 million to 779.2 million. And management has authorized an additional share-buyback program, which will reduce those numbers even further.

My problem with Canadian National Railway is that it’s expensive, trading at a 20.56 price-to-earnings ratio. This is part of the reason that the yield is as low as it is; however, with cash flow increasing lucratively, I see little reason why the dividend won’t increase in future years, especially if it can keep its operating ratio strong. Perhaps don’t back up the truck, but having a sizeable position here will increase your portfolio strength.

Should you invest $1,000 in Canadian National Railway right now?

Before you buy stock in Canadian National Railway, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Canadian National Railway wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

money goes up and down in balance
Dividend Stocks

Invest $25,000 in These Dividend Stocks to Combat Currency Fluctations

These dividend stocks could turn a $25,000 investment into a huge income stream – and help battle ongoing volatility.

Read more »

exchange traded funds
Dividend Stocks

I’d Invest $12,000 in These 3 High-Yield Dividend ETFs for Passive Income

Market turbulence? Sleep easy with these three high-yield dividend ETFs that provide steady monthly income while you wait for recovery.

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

How I’d Use $15,000 in 3 Monthly Dividend Stocks for Consistent Income Potential

Monthly dividend-paying stocks like Peyto Exploration and Development offer generous yields and strong growth prospects.

Read more »

A worker gives a business presentation.
Dividend Stocks

Where I’d Allocate $10,000 in Dividend Stocks for Decade-Long Appreciation

Here are two TSX dividend stocks I’d buy for long-term capital gains and dividend income if I had $10,000 to…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Can the Maximum TFSA Room Keep Up With Inflation?

Just because you want to make major gains in a TFSA during inflation doesn't mean making risky investments.

Read more »

hand stacking money coins
Dividend Stocks

RRSP Investors: 2 TSX Stocks With High Dividend Yields to Consider Now

These TSX stocks now offer dividend yields above 6%.

Read more »

woman analyze data
Dividend Stocks

Why I’d Allocate $8,000 to These 3 Low-Volatility TSX Stocks for Steady Returns

Low-volatility TSX stocks like Fortis can offer investors some predictability and shelter in this wildly volatile market.

Read more »

Man looks stunned about something
Dividend Stocks

Trump Crashed Your Stocks? Read This Before Selling

When markets crash, dollar cost averaging into dividend funds like BMO Canadian Dividend ETF (TSX:ZDV) often works.

Read more »