The Evolving Opportunity in Railroad Investments

Canadian National Railway (TSX:CNR)(NYSE:CNI) offers investors a unique mix of growth and income-earning opportunities, and it currently trades at a discount.

| More on:

The stereotypical view of railroads among investors is that they are old, low-tech relics from the last century that have little impact on the market and are not evolving with the changing trends in technology. Canadian National Railway (TSX:CNR)(NYSE:CNI) is often the target of those criticisms, which, unfortunately, masks what is an incredible opportunity for investors.

Let’s try to dispel those myths and highlight the opportunity for investors.

Railroads are old relics

A common fallacy among investors is that railroads are low-tech remnants of the 19th and 20th centuries. While it is true that railroads were originally developed and built well over a century ago, this provides an advantage, not a disadvantage to the 21st-century investor.

When railroad networks were built to connect factories and distribution centres, few people realized that the cities and communities that developed around those railroads would create an incredible moat. In fact, the development of those communities has made it nearly cost prohibitive for new railroad networks to emerge. Following a series of mergers in the 90s, a strict set of criteria were adopted to discourage, if not prevent, further consolidation in the marketplace.

This has worked out well for Canadian National, which is the only railroad on the continent with access to three coastlines on a sprawling network of over 30,000 kilometres.

That’s not to say that railroads can’t grow — Canadian National recently submitted a bid to acquire part of the Halterm container terminal in Halifax. Halifax is the fourth-busiest port by container traffic, behind only Vancouver, Montreal, and, most importantly, Prince Rupert, where Canadian National already has a large presence.

The northern B.C. port that Canadian National serves has proved to be of particular success, and experts think this latest approach in Halifax has put Canadian National down the path of establishing a similar success story on the east coast.

Railroads are low tech

As for the low-tech myth, let’s talk about oil for a moment.

Canadian National and other railroads can haul oil and chemicals. These are incredibly fragile and volatile products to ship, as shifts in massive amounts of liquids, even at low speeds, could quickly become a derailment and ecological disaster, not to mention render the track offline for a considerable amount of time.

Fortunately, Canadian National is working on a revolutionary new process that converts oil into a dry product that is coated in a polymer that allows it to be shipped safely and quickly like any other material. Upon arrival, the polymer is removed and the solid product can be refined.

Once this process becomes common use, the potential opportunity for Canadian National will be huge. Unfortunately, the technology is still a few years out, but there’s no reason for investors to pass on the stock until that time.

Railroads have little impact on the market

In many ways, railroad networks are viewed as arterial veins of the economy.

Railroads haul an incredible amount of freight that is vital to the market. In terms of freight, railroads haul everything from automotive components and raw materials to crude oil and crops, which currently amounts to nearly $250 billion worth of goods every year.

That’s an incredible number of goods, and the absence of that rail network could prove disastrous.

A glimmer of that very point came about last year as a harsh and long winter caused system-wide delays last February, resulting in a domino effect on the economy, as plants remained without parts, farmers were left waiting for trains to pick up their goods, and refineries operated on lower capacities.

Final thoughts

Railroads are great investments. The recurring revenue and necessity that they provide to our modern society are without dispute, and growth-seeking investors will appreciate the opportunity that the current pullback in the market has provided.

From an income standpoint, Canadian National offers a quarterly dividend that pays a yield of 1.83%, which, while not the best return on the market, is a respectable return from a stable segment.

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 of the 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 Investing

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

rising arrow with flames
Investing

2 Riskier Stocks With High Potential for Canadian Investors in November

Risky stocks such as Well Health Technologies have the potential to provide life-changing long-term returns.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »

Canada day banner background design of flag
Investing

Got $500? 5 Top Canadian Stocks to Buy and Hold

These top Canadian stocks have solid fundamentals with potential to outperform the benchmark index by a wide margin.

Read more »

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

Asset Management
Stocks for Beginners

TFSA: 4 Canadian Stocks to Buy and Hold Forever

Thinking about what to buy with the new TFSA contribution space in 2025? These four Canadian stocks are worth holding…

Read more »