Kansas City Southern – A Prime Target for Takeover

Kansas City Southern Inc (KSU) is the smallest of the North American railroad companies operating approximately 6,500 miles of rail network, serving business centers in south central US and Mexico.

The railroad industry is facing pressure to collapse in traffic in coal and petroleum products. This has caused companies to entertain the thought of M&A. KSU remains uniquely positioned with a great rail network and seamless access to the Mexican market – a region seeing higher industrial/manufacturing activity over the years in North America. A smaller company with a market cap of under $10B, makes KSU a great takeover target from any of the larger railroad operators. With a low starting yield of 1.5% and low payout ratio of 27%, there is plenty of room for those dividends to grow. Is this company a buy now?

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Canadian Pacific Dividend Stock Analysis 2015

Canadian Pacific Railway Ltd. (CP) is the smaller of the two Canadian railroad companies operating approximately 13,700 miles of network, serving business centers from west coast to east coast Canada and the United States Northeast and Midwest regions. The company has come a long way and has turned to become one of the most efficient and profitable companies in the sector. In a matter of three years, the operating margins have doubled. However, dividend growth investors have found it disappointing as the company has not raised dividends since 2012. With a low starting yield of 0.75% and low payout ratio of 15%, there is plenty of room for those dividends to grow, but the company – thanks to its largest shareholder Pershing Square Capital has gone the route of share buybacks to return cash to shareholders. That trend is expected to continue as the company intends to raise more cash from the debt markets to issue further buybacks.

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Canadian National Railway Dividend Stock Analysis 2015

CNR

Canadian National Railway Company (CNR.TO) (CNI) is the second-largest railroad company in North America. The company operates 20,000 miles of network serving three coasts — Atlantic, Pacific, and Gulf coast. CN operates in one of the widest moat industries — railroads. The company has a diversified traffic volume including intermodal, petroleum & chemicals, grain & fertilizers, forest products, metals & minerals, automotive, and coal.

The company is a dividend challenger having raised dividends for 18 consecutive years and has a 5-yr CAGR of 15.2%. The company has the best in class operating margins beating out giants such as UNP, NSC and CSX.

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Sector Overview – Railroads

Fewer investments garner as much as attention to the pulse of the economy as the railroad sector. The railroads are considered a leading indicator for the overall health of the economy as transportation of goods is critical and gives investors a sense of how companies and consumers are spending their money. If we observe legendary investors such as Warren Buffett and Bill Gates – it is clear that they are fans of the railroad companies and believe in the long term prospects with Buffett’s Berkshire Hathaway buying out Burlington Santa Fe (BNSF), taking it private and Gates’ Cascade Investments holding a sizeable position in Canadian National Railway. Railroads are what we call a wide-moat industry sector – where it is extremely hard for new entrants to get established and challenge the incumbents. This makes the railroads very attractive for long term investors.

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 services a few years ago) has fallen due to the fall in crude prices and rise of green energy alternatives, the transportation need for crude saw significant rise in the recent past. However, the recent turn of events with falling energy prices, has put a damper on crude transportation via railroads. The following chart from Association of American Railroads shows the trend in traffic for various payloads.

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