One last buy before November concluded. This is a transaction I wasn’t expecting to place, but the crash in oil prices following the OPEC decision to not cut oil supply to the market caused repercussions elsewhere in other industries. I initiated a new position in Canadian National Railway (CNR.TO) (CNI). Canadian National Railway is the larger of the two Canadian railroad companies and the second largest publicly traded railroad companies in North America. The company commands 20,000 miles of tracks and is strategically well placed to move oil from Alberta, the Bakken fields and to/from the refineries in the Gulf Coast. A holding of Bill Gates’ Cascade Investments, this stock has made Mr. Gates and his investment firm very rich over the years. I have initiated with a position of 20 shares in the Canadian listed stock, which adds C$20.00 to my dividend income annually going forward.
The Case for Railroads
Railroads are the pulse of the economy. Whether transporting crude, lumber, merchandise, agricultural or industrial products, railroads are what keeps the economy moving. While the transportation for entities such as coal (which used to be the largest users of railroad service a few years ago) have fallen due to the fall in crude prices and rise of green energy alternatives, the transportation need for crude has risen significantly. North America is going through an energy revolution with the rise of crude production in Alberta, the Bakken fields in North Dakota and the Eagle Shale. While pipelines are the largest competitors for crude transportation, the immediate lack of infrastructure spells good news for the railroads.
Top-line growth has continued to increase year over year for the past 10 years, with the exception of the year 2009, where the company saw the effects of the recession. Earnings per share (EPS) and Free Cash Flow (FCF) remain stable and have maintained the uptrend over the years.
CNR.TO pays $1.00 in dividends annually, and at the time of this writing, yields a modest 1.23%. The Canadian National Railway is a Dividend Contender, having raised dividends for 17 years in a row. The 1/3/5/10-year dividend growth rates (DGR) are 10.7/16.6/13.9/17.4%. The EPS payout ratio is currently at 27% and FCF payout ratio is 46%. There is still plenty of room for dividend increases over the coming years.
Recent Buy Decision
- Railroads are the pulse of the economy and are critical in the transportation of industrial, lumber, crude, merchandise and agricultural products. An essential part of every portfolio, railroads had been missing from mine, and I decided that this was as good a time as any.
- A wide moat industry – the players are well established and it is hard for upstarts to disrupt the incumbents
- CNR has a very strategically well diverse network servicing the Pacific, Atlantic and Gulf coasts.
- Dividend growth rate is stellar in most major railroad companies, even though initial starting yield is low.
- The stock is currently not cheap. At PE 22, the stock is overvalued. However, I am investing for the long term and a strong company like CNR is hard to find at cheap prices. I will be averaging down on this cost basis over the coming months/years.
- The crash in oil presents some headwinds for the railroads. While the running costs decrease due to fall in oil prices, the bulk of payload is crude. The crash will probably result in cutbacks, M&A, terminations in oil production companies, meaning that the revenues for the railroads might be affected over the coming quarters.
- Development of pipelines presents more headwinds. Transporting via pipelines is cheaper, safer and more reliable (no delays due to weather or other unforeseen circumstances) and railroads will feel the pinch once more infrastructure in the ground.
Read this full dividend stock analysis for details on the value of the company, including more detailed outlook, advantages and disadvantages to the industry.