Let’s get right into this. There are a lot of great reasons to invest in Canadian National Railway (TSX:CNR). After all, the company is part of a duopoly in the railway system in Canada that it simply cannot be edged out of.
Yet after seeing part of that duopoly cut its dividend in recent years to fund acquisitions, how safe is that dividend really — especially as operation costs continue to rise? Let’s look at this today.
Let’s look at those costs
First off, the major reason that we’re considering whether CNR stock may need to cut its dividend is due to these rising costs. Those costs look like they could only rise higher in the coming years as the price of fuel surges.
Historically speaking, CNR stock was the company with the lowest operating ratio during the 2000s. The company managed to make great use of its trains, along with its ports. After focusing on growth throughout the pandemic, the company has now had to think again. This included major leadership changes in 2022, with growth tempered by ongoing events such as the pandemic, weather, and strikes.
Throughout this, however, the company achieved solid cash flow, with CNR stock achieving free cash flow in the high teens. So, it does seem that even as operating costs rise, it’s unlikely the CNR stock will suddenly suffer on that account.
Strong financial position
Thanks to the overhaul in the 2000s, CNR stock has its strong cash position built into its DNA. At the end of 2022, it held $328 million in cash and about $500 million in restricted cash. That’s compared to about $15.4 billion in total debt, though it has enough liquidity to handle any problems that come its way, especially with its solid free cash generation.
Indeed, it now looks valuable, with the stock trading at 5.98 times book value and 13.01 for its enterprise value over earnings before interest, taxes, depreciation, and amortization (EBITDA). Furthermore, it would take 94.19% of its equity to cover all its debts. This is ideal, as most companies do not have enough equity to cover their debts.
How risky is it?
Analysts believe the CNR stock at this point is of medium risk. While it certainly is connected to the health of the Canadian and U.S. economies, it also has sustainable long-term contracts that keep it running through three coastlines. However, outside influence can certainly affect the stock as well, including weather and poor industrial production.
It also has exchange-rate risks, which can certainly hurt the company when the U.S. likely improves its economy before Canada. Fuel prices, liabilities from hazardous spills, and reregulation also pose a risk to the company’s ongoing performance.
When it comes right down to it, we have to look at the dividend. It currently has a payout ratio of 42.1%, as of writing. That is an incredibly sustainable payout ratio at this stage, with just 42% of its net income going into dividends. So, it seems that, for now, at least, CNR stock has a safe dividend currently of $3.16 per share annually. Yet, should it go guns blazing towards growth once more, that could change very quickly.
