Canadian National Railway (TSX:CNR) stock has delivered solid returns for shareholders over the years and decades. Its stock is up 56% (a 9.3% compound annual growth rate, or CAGR) over the past five years, and 180% (a 10.85% CAGR) over the past 10 years.
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A strong long-term “track” record
When you add in dividends, CNR’s total returns are closer to 71% (an 11.4% CAGR) and 233% (a 12.8% CAGR) over the past respective five and 10 years. Since 1996 (when CNR stock was publicly listed), this TSX stock has delivered a 5,906% total return. So, is CNR still a stock worthwhile owning for the coming years?
Canadian National has certainly stood the test of time. It has been operating ever since 1918. In Canada and the United States, rail is still the only way to transport bulk commodities/goods efficiently and affordably. With only one other major competitor in Canada, CNR operates in a defensive duopoly.
It tends to have a solid competitive moat (especially in regions where it is the only rail line in and out of town) and a persistent ability to grow rates at or above inflation.
Many competitive advantages preserve long-term profitability
CNR’s rail network is almost impossible to replicate. The land has been purchased, and the infrastructure installed. A prospective competitor would need to spend tens of billions of dollars to build the infrastructure. In most cases, the land is just not available.
CNR can grow its volumes and capacity at limited incremental expense. It already has excess land to add additional services. Under its new chief executive officer, CNR is further maximizing the utility of its total network through precision scheduled railroading.
This helps it increase volumes and train velocity but in an operationally efficient and profitable manner. That’s why even in a down year for volumes, it can still generate 20-25% earnings margins.
CNR stock has grown steadily and increased its dividend regularly
Over the past five years, CNR stock has grown revenues, earnings per share, and free cash flow by respective CAGRs of 5%, 6%, and 14%. Given its strong cash generation, CNR has a strong balance sheet with adjusted debt-to-adjusted earnings before interest, tax, depreciation, and amortization of 1.86.
The company has increased its dividend by a 15% average annual rate over 27 years. It increased its dividend by 8% in 2023.
With a strong balance sheet and significant cash generation, it has the capacity to buy back a large amount of shares as well (up to 5% in 2023 alone). CN believes it can achieve 10-15% average annual earnings per share all the way to 2026.
Is it too late to buy CNR stock?
CNR stock is not exactly cheap today. With a price of $166 per share, it trades with a price-to-earnings ratio of 22. That is at the mid- to higher end of its historical valuation range. It has a dividend yield of 1.9%, which is closer to its long-term average.
Its stock has had a strong recovery since October 2023. As a result, it is not exactly a bargain today.
This is a very good long-term stock to hold. However, if you want to maximize your returns, it might be best to be patient for an inevitable pullback before deploying into a full position.
