Canadian National Railway (TSX:CNR) is one of Canada’s best-performing, long-term dividend stocks. Its yield is not very high, but what it lacks in yield, it makes up for in growth. Over the last 10 years, CNR has grown its dividend at a CAGR rate of 14.4%. “CAGR” means compound annual growth rate, a return metric that takes into account the effects of compounding.
This year, CN Railway stock is not doing all that well. Down 3.92% for the year, it has underperformed the market. This is peculiar, because the company that underlies the stock is doing quite well. It beat analyst expectations in its most recent earnings release and delivered strong growth. In this article, I will explore several reasons why I would buy this year’s dip in CN Railway stock — and why I haven’t done so yet.
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Stock down, earnings up
As mentioned, CN Railway’s stock is down nearly 4% this year. However, its earnings are actually up. In its most recent quarter, CN Railway delivered the following:
- $4.31 billion in revenue, up 16.3%
- $1.93 billion in operating income, up 29%
- $1.22 billion in net income, up 33%
- $1.82 in diluted earnings per share (EPS), up 38%
The growth was very strong, and the results were ahead of analyst expectations. If CN Railway keeps these kinds of results up, it will be more valuable in the future than it is today.
Long-term moat
As we’ve seen, CN Railway recently delivered excellent results that would drive significant appreciation in the company’s stock price were they to continue indefinitely.
Will the strong results continue indefinitely?
That’s hard to say, but there is at least one factor that argues for that scenario playing out: CN Railway’s moat.
In financial parlance, “moat” refers to a long-term competitive advantage, something that prevents a company’s competitors from encroaching on its territory. A moat could be a strong brand, a valuable patent, a government-enforced monopoly, or something else of that nature.
In CN Railway’s case, the moat is mainly the fact that the company has only one competitor in Canada: Canadian Pacific Kansas City Railway. That company competes with CNR in Canada. A few companies compete with it in the United States. Overall, it (rail transportation) is not a highly competitive industry. And it’s unlikely to become one. Starting a railroad requires billions of dollars in capital, and most entrepreneurs today are more interested in starting tech companies than railroads. It seems unlikely that a new rail upstart is going to start cutting in on CN Railway’s action anytime soon.
Nevertheless, rail is actually a great business. Rail is the cheapest way to ship goods by land, giving it an edge over trucks. Railroads often have profit margins of around 30%, along with steady growth. Put simply, the rail industry is doing very well right now. CN Railway, with its strong competitive position, should do at least as well as the industry, if not better.
So, I would definitely buy this year’s dip in CN Rail stock. I’ve owned the stock in the past, and I’d own it again in the future. The only reason I haven’t bought it back yet is because it isn’t cheap enough for my liking. If it fell to 15 times earnings, I’d jump right back in.
