This Railroad Has Become a Very Attractive Investment

Improving market conditions and a massive investment into infrastructure mean that Canadian National Railway Company (TSX:CNR)(NYSE:CNI) has become an even better investment than before.

| More on:
The Motley Fool

Canadian National Railway Company (TSX:CNR)(NYSE:CNI) has one of the most impressive moats of any company on the market, yet investors often dismiss the company as a relic of an era long passed its prime.

Railroads aren’t exactly the bleeding edge high-tech investment you would expect from a company that hauls over $250 billion worth of goods each year, yet that’s exactly what Canadian National is.

Here’s a review of why now, more than ever before, this leading railroad belongs in your portfolio.

Canadian National’s moat is more than impressive.

It’s no surprise that railroads offer one of the most impressive moats on the market, but few people realize just how impressive and secure that moat is.

Railroads connect every major metropolitan area on the continent with the factories, ports, and warehouses necessary to keep the economy running. In some ways, rail networks can be viewed as arterial veins of the North American economy, and Canadian National’s network of over 32,000 kilometres of track is the only railroad on the continent with access to three coastlines.

Building and running a railroad is an expensive business, Canadian National’s massive network size effectively prevents any would-be new competitors from emerging to counter CN’s supremacy.

From a mergers and acquisition standpoint, following a series of mergers between Class 1 railroads in the 90s, the Surface Transportation Board (STB) set in motion a series of controls and regulations to discourage, if not prevent, mergers from Class 1 railroads from occurring.

For a railroad, efficiency is king

Hauling freight across the continent and through intermodal terminals requires a mastery of logistics and incredible efficiency to still emerge profitably. Fortunately, this is one area in which Canadian National has excelled at in the past.

The operating ratio is a measure used by railroads to indicate their efficiency, which is the operating expenses as a percentage of revenue. The lower the number, the more efficient the railroad.

At the end of fiscal 2016, Canadian National’s operating ratio was an industry best 55.9%. More recently, that number has slipped, coming in at 67.8% in the most recent quarter. That slippage was primarily attributed to the long and harsh winter, which followed an unusually plentiful harvest.

Those delays made a unique buying opportunity

The unfavourable weather caused a number of system-wide delays, which caused a domino effect, ultimately leading to Canadian National meeting just 17% of its orders in February and reporting weaker-than-expected results in the most recent quarter.

However, the delays did create two unique situations that potential investors in Canadian National should take into consideration.

First, the company leased an additional 130 locomotives and hired additional crews to boost capacity and clear the backlog. This not only cleared the backlog stemming from the seasonal delay, but also forced Canadian National to commit to further capital upgrades, which now total $3.4 billion and include $400 million earmarked specifically for infrastructure development in the western half of the country.

The second point relates to the impact of the delays this past winter. The delays, which have since cleared, drove the stock price down and in turn created an intriguing buying opportunity for investors.

While Canadian National has mostly recovered from the drop in stock price, the company still trades relatively flat over the trailing six-month period. This scenario is unlikely to continue for much longer given the incredible buying opportunity that Canadian National continues to represent.

Is Canadian National a good investment?

Canadian National remains a great investment opportunity for investors looking for growth as well as income. The quarterly dividend payout provides a healthy 1.78% yield, which, while not the strongest yield on the market, is a stable, secure and growing dividend.

Canadian National currently trades at just over $102 with a P/E of 10.84.

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 Demetris Afxentiou 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.

More on Dividend Stocks

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

Dividend Stocks

The 3 Top Canadian Stocks to Buy With $1,000 Right Now

If you want consistent income, look to consistent dividend payers. These three stocks are some of the best in the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Want a 6% Average Yield? 3 TSX Stocks to Buy Today

These stocks pay good dividends that should continue to grow.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Is Alimentation Couche-Tard Stock a Buy for its 0.9% Dividend Yield?

Couche-Tard stock's small yield is not enticing, but its growth potential could be a wealth creator.

Read more »

Hourglass and stock price chart
Dividend Stocks

5.2% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades!

With its 5.2% dividend yield, Toronto-Dominion Bank (TSX:TD) is a stock I'm eagerly buying.

Read more »