Recent Buy – Canadian National Railway

CNR

The stock market is going through some wild swings. There are plenty of reasons for the overall sentiment to be down for active traders, but that just means a great opportunity for long term investors to pick up some quality companies in the midst of the panic. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. This is one last purchase for the month of August, adding to an existing position.

I added to my position in Canadian National Railway (CNR.TO) with 12 shares @ C$72.50. The stock currently yields 1.72% adding C$15 to my forward annual dividends.

Company Overview

Canadian National Railway Company, together with its subsidiaries, engages in rail and related transportation business in North America. It offers transportation services that include rail, intermodal container, and trucking services; and supply chain solutions, including warehousing and distribution, cargoflo, logistics parks, freight forwarding, customs brokerage service, industrial development, and marine services. The company transports various goods, such as automotive, coal, fertilizers, food and beverages, forest products, dimensional and heavy loads, shipping grains, metal and minerals, petroleum and chemicals, specialty crops, and intermodal products. It operates a network of approximately 20,000 route miles of track spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico. It serves the ports of Vancouver, Prince Rupert (British Columbia), Montreal, Halifax, New Orleans, and Mobile (Alabama); and the metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth (Minnesota)/Superior (Wisconsin), Green Bay (Wisconsin), Minneapolis/St. Paul, Memphis, and Jackson (Mississippi), with connections to all points in North America. Canadian National Railway Company was founded in 1922 and is headquartered in Montreal, Canada.

Recent Buy Decision

  • Railroads are the pulse of the economy and are used as a leading indicator of the overall health. A critical industry, transportation of goods across the continent via railroads enjoys a wide economic moat (new companies cannot break into the space easily).
  • The second largest railroad network in North America with approx 20,000 miles of tracks servicing three coasts – Atlantic, Pacific and Gulf coasts. No other network has such a wide varying service network.
CNI map

Canadian National Map

  • I recently recapped the railroad sector (see post here) and CN is the best of the breed with the best operating margins (39.6%) beating out other giants such as Union Pacific (UNP).
  • Absolutely fantastic fundamentals: 5-yr revenue growth 10%, carloads 5%, EPS growth of 14%, adjusted EPS growth of 16%; debt/equity of 0.67.
  • Starting dividends may seem low at 1.72%, but the dividends have been growing for 18 consecutive years making CN a Dividend Challenger. The 1-, 3-, 5-, and 10-yr dividend growth rates are 9%, 11.3%, 15.2%, and 17.4% respectively. The current payout ratio is a low 27.6%, making future increases almost guaranteed.
  • CN has 32% of its revenue generated in the US. With the Canadian dollar falling nearly 13% YTD, that should give an extra boost to this years revenue and earnings.
  • While I do not believe in blindly following other investors, I find comfort to see that Bill Gates’ Cascade Investments LLC has been buying more CN lately and now occupies the second highest portfolio exposure. CN now makes approx 14% of Cascade Investments LLC.
CNR-FastGraphs-29082015

10-yr F.A.S.T Graphs chart for Canadian National (CNR.TO)

Risks

  • With the collapse of the commodity market, the overall health of the economy is being questioned. We might still see some downside movement before the economy and the railroad sector recovers.
  • 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 growth over the last couple of years was due to crude-by-rail.
  • 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 is in the ground.
  • Transportation by rail, esp volatile payload such as crude oil, can be dangerous. A derailment or other accidents can result in plenty of bad press for the companies.
  • Stricter legislation such as environmental standards mean that utilities and power generation companies are cutting back on dirty coal as a source of energy – again, a decrease in payload for the transportation industry.

Further Reading

Full Disclosure: Long CNR.TO. My full list of holdings is available here.

17 thoughts on “Recent Buy – Canadian National Railway

  1. R2R,

    Gotta love that unique T-shaped network there!

    I’m a big fan of this industry. The built-in competitive advantages are second to none. Interesting that the graph has the stock as overvalued, though. I personally prefer UNP with its much higher yield, higher dividend growth rate, larger network, and cheaper stock. But Canadian National is an excellent business as well. If I were to own a third railroad (and I might), CNI will be it.

    Keep it up!

    Best regards.

    • Yup, love that T shaped track across the continent.
      According to the 10-yr graph on FAST Graphs, its a bit overvalued, but on a 5-yr basis, its a bit undervalued. Overall, I think its a fair price considering the state of the economy and the headwinds and risks ahead. UNP definitely is high on my list of companies to own – would love to buy now that its in the low 80s.

      Thanks for stopping by and sharing your thoughts. Appreciate it.
      R2R

  2. Great buys lately R2R. Starbucks and now CNR. love collecting Quality Assets. It’s wonderful picking up great companies and holding for pretty much ever. Happy hunting in the coming months my friend. Cheers.

    • You said it, DH. Cant go wrong adding these quality assets. Your comment on CN brought it to my attention that its attractively priced and need to look at it closely.

      Thanks for stopping by and the encouragement, bud.

      cheers
      R2R

  3. Looks like a solid buy. I know the rails have been very popular among many of the DGI portfolios. I still don’t own any but NSC, CSX and CNR.TO do look compelling. I know these companies operate on a very wide moat business model which is always nice and with the drop in oil it seems that the energy sector has dragged the rails along with it. This should provide you with many years of solid dividend returns.

    • It took me a while to warm up to the idea of investing in railroads, but now I see the advantages of investing in it. No wonder superinvestors such as Buffett and Gates love and invest a lot of their money in railroads. While the valuation goes up and down, it remains a critical part of the economy. Looking forward to see if you pick one….all the companies you mentioned are great ones.

      Best
      R2R

    • Believe it or not, I was just looking at the valuations again today. I have gone back and forth and always shied away since it doesnt pay dividends – but I think if theres any company that deserves an exception – its BRK. Now that it has fallen down under $130, I am tempted to initiate a new position and invest in BRK.

      I’ll have to check out your blog – its new to me. Thanks for stopping by.
      R2R

Leave a Reply

Your email address will not be published. Required fields are marked *