Canadian Pacific Railway Limited (TSX:CP) and Canadian National Railway Company (TSX:CNR) Are Buying Back Shares Quickly: Should You Join?

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI) are up by more than 800% since 2001. Is more growth around the corner?

| More on:

You could be forgiven if you thought Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI) were in the same business. Sure, both operate railroads across huge swaths of North America, but their risks and potential rewards are very different.

Since 2001, shares of Canadian National have risen by roughly 820%. Shares of Canadian Pacific, meanwhile, have rocketed higher by more than 1,600% over the same period. If you had invested in either company at the beginning of the century, you would have looked extremely savvy, but by choosing the correct stock, you would have had double the return.

Over the past 12 months, Canadian Pacific stock is up only 4%, while shares of Canadian National actually fell by 3%. Has the meteoric rise of both companies come to a halt, or are shares now on sale? Judging by both companies’ aggressive stock buyback programs, it appears that their management teams believe their best days are ahead of them.

Both railroad companies are buying back their own stock

In October, Canadian Pacific reported record sales driven by a record number of crude oil carloads. Crude-by-rail has been the single largest growth driver in the railroad industry throughout the past decade. With rapidly rising production from both shale and oil sands regions, there hasn’t been enough pipeline infrastructure to transport the massive energy output.

For example, the company shipped 23,000 carloads of crude oil in the third quarter of 2018, 300% higher than the year before. Adjusted operating cash flow should surpass $2.5 billion this year. Free cash flow should also surpass $1 billion. These results should help fuel the company’s share repurchase plan.

In October, it authorized a 5.7 million stock buyback program, which equates to 4% of the entire company. That same month, an analyst from Stifel called Canadian Pacific “one of the best-managed and most efficient railroads in the world.” Judging by the companies long-term results, it’s tough to argue otherwise.

Canadian National also instituted an accelerated share buyback in October, intending to repurchase 5.5 million shares, roughly $400 million worth. Compared to Canadian Pacific’s $1 billion buyback program, Canadian National’s appears much less aggressive, but it’s important to note that these repurchases will be completed over the next 90 days. So, in just three months, the company anticipates buying back nearly 1% of the entire company. It’s also important to note that before its most recent program, Canadian National completed a $2 billion share buyback program.

Thanks to large capital investments in 2018, Canadian National should have ample free cash flow in 2019 to support ongoing share repurchases, plus its growing 1.8% dividend. By the end of 2018, the company should have spent about $3.5 billion in capital expenditures.

Keep an eye on energy prices

Long-term, the demand for shipping goods will continue to increase. Even with ample pricing power, shipping by rail remains one of the most economically attractive methods of moving goods across long distances. The massive moat nearly every railroad has isn’t set to disappear anytime soon.

Crude-by-rail, however, is more volatile. With energy prices falling lower, many oil sands producers in Canada are struggling to turn a profit. Large producers like Encana Corp and Baytex Energy Corp have huge debt loads and are fighting to avoid bankruptcy. There’s no doubt that weak crude shipments would greatly impact both Canadian National and Canadian Pacific’s record profits.

Long-term, companies like Gibson Energy Inc. are building terminals and pipelines to relieve the need to ship oil by railroad. While these assets will take time to come online, they remain the biggest risk to Canadian railroads. Apart from this risk, however, these business should be able to earn attractive risks for many years to come. Today, investing in either company is more of a bet on high oil prices than the traditional economics of a railroad.

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 Ryan Vanzo has no position in any stocks mentioned. CN is a recommendation of Stock Advisor Canada.

More on Investing

stocks climbing green bull market
Dividend Stocks

A Top Investor Says This Strategy Outperforms 95% of Fund Managers

Buying Canadian National Railway (TSX:CNR) cheaply would probably work out well.

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

3 Everyday CRA Red Flags Investors Should Really Know

The CRA can be a blessing and a curse, but if you make sure to follow the rules and not…

Read more »

Nurse talks with a teenager about medication
Tech Stocks

Shares of WELL Health Just Zoomed. Is It a Buy?

Given its improving financials and healthy growth prospects, WELL Health could deliver superior returns over the next three years.

Read more »

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies
Tech Stocks

3 Artificial Intelligence (AI) Stocks to Buy With $1,000 and Hold for Decades

Three TSX stocks are excellent choices for Canadians looking for exposure to significant AI players.

Read more »

up arrow on wooden blocks
Investing

Here Are My Top TSX Stocks to Buy Right Now

These top TSX stocks are supported by businesses with solid growth prospects and have the ability to deliver stellar returns…

Read more »

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

Where Will OpenText Stock Be in 1 Year?

OpenText (TSX:OTEX) stock's uncertain future: AI potential versus stagnant growth over the next 12 months

Read more »

Abstract Human Skull representing AI
Tech Stocks

Is Lightspeed Commerce a Buy After Q2 Earnings?

Given its healthy growth prospects, improving profitability, and reasonable valuation, I expect Lightspeed's uptrend to continue.

Read more »

GettyImages-three smiling investors_using tablet
Tech Stocks

2 Reasons to Buy Nvidia Before Nov. 20 and 1 Reason to Wait

This top AI stock has soared nearly 200% this year.

Read more »