Choo-Choo! CN Railway Stock is ready to rock | So Good News
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Canadian National Railway (TSX:CNR) is one of Canada’s most reliable dividend stocks. It has a dividend yield of 1.8%, which is relatively low, but it has raised its dividend every year for the past 24 years. Over the past 10 years, the growth rate has been 15% annually. So CNR has better than average dividend growth.
From a dividend investor’s perspective, CN Railway is a solid bet. The yield isn’t too high, but the growth is phenomenal, and the payout ratio (dividend divided by earnings) is just 36.6%. And CN Railway isn’t just appealing as a dividend play. Even if it didn’t pay dividends, the stock would be a solid bet, as the rail industry is set to grow modestly and CN Railway has a solid competitive position in the industry.
Why CN Railway is well positioned here
CN Railway is well positioned for two reasons:
- The railway industry is very well adapted to today’s economic conditions.
- CN Railway has a strong competitive advantage compared to other railways.
Each of these points is worth exploring in detail.
First, the rail industry is well positioned, because rail transports many of the goods that are in demand this year. You may have heard of shortages of oil, grain, lumber, fertilizer and other such commodities. Indeed, there have been shortages in all of these product categories – specifically shortages in shipments coming out of Europe. Supply in North America is as steady as it has ever been, so North American railroads can benefit from increased volume caused by higher demand for domestic raw materials.
Second, CN Railway has advantages compared to other railways, because it touches three North American coasts. This gives it a natural advantage in certain shipping routes. Let’s say you wanted to ship something from British Columbia to New Orleans. The natural railway for that is the CN Railway, because it goes to both of these areas. So, CN Railway has a competitive advantage in long-distance North American shipping.
In the most recent quarter, CN Railway posted $2.13 in adjusted earnings per share (EPS) and $4.51 billion in revenue. Both of these figures were all-time highs for the company, and ahead of what analysts expected. On the negative side, income was somewhat held back by higher fuel costs. The higher fuel prices go, the more money railroad companies have to spend moving trains, so high oil prices (which mean higher fuel prices) can eat into their margins.
A risk to watch out for
As we have seen, CN Railway is a solid company that is beating analysts’ expectations and is well positioned for the coming years. These are all good things. Still, there is one risk investors will be aware of: fuel costs. As mentioned earlier, the higher the price of oil goes, the more money the railways have to spend on fuel. CNR is no different from any other railway in this regard. The company has some room to increase transport charges in response to higher costs, but in the short term fuel prices could be an issue. To me, they are not a deal breaker, but they can be a problem if you have a short time horizon and are hoping to make a quick buck on a good income.