MENU

First Brexit… then Trump… Now, it’s time for Pro

Is your portfolio really prepared for what’s coming next?

To help investors like you navigate this historically uncertain — yet high-flying — market and prepare for an inevitable downturn, we’re re-opening our Motley Fool Pro Canada service to a select few new members for a short time.

To discover how Pro Canada could help you to increase your upside potential… reduce your downside risk… and earn paycheque-like income in the process, simply click here — before the small number of spots we have left are all gone!

Where Does Canadian National Railway Company Go From Here?

Canadian National Railway Company  (TSX:CNR)(NYSE:CNI) had a relatively tepid second quarter, leaving investors unsure about how they should feel about the company. For those on the sidelines, deciding whether to buy or not can be a tricky decision.

In its second-quarter financial results, the company revealed that it had brought in $2.842 billion in revenue–down from $3.125 billion in the previous year. Its operating income was $1.293 billion–down from $1.362 billion.

So obviously, less money is coming in, which makes sense because the Canadian economy is weak.

Recognizing there is little Canadian National can do to control the economic headwinds it’s facing, the company has been investing its resources in improving its efficiency. There are two ways to increase profit: it can increase revenue or cut costs. Canadian National is doing the latter right now.

For example, Canadian National had a 7% increase in its gross tonne miles per train mile. Its terminal dwell dropped from 14.6 hours to 13.6 hours. Each minute saved is another minute the train is earning money. It increased its car velocity from 227 miles per day to 239 miles per day. And it also increased the train velocity from 26.2 mph to 27.6 mph. Canadian National is moving goods faster, unloading those goods faster, and ultimately increasing how much it can transport.

Canadian National was able to achieve an operating ratio of 54.5%–a record for the company and the lowest of all the Class I railroads that it competes with. The lower this number, the more efficient the railroad is, and the more it can earn in profit. This is a big reason why its net income was only down by 3% despite revenue being down by so much more.

But what about the future?

Management believes that it will be able to deliver an adjusted diluted EPS of $4.44 through 2016, which is in line with what it reiterated back in April 2016. The reason for this is that while lumber, automotive, and refined petroleum products remain strong, commodities related to oil and gas development are expected to decrease. And there is, of course, uncertainty surrounding grain.

Fortunately, the company isn’t standing still. It announced at the end of July that it would be purchasing common shares under three specific share-repurchase programs. This falls in line with its announcement back in October 2015 that it would buy upwards of 33 million shares. This is obviously good news because it increases earnings per share and increases each investor’s percentage of the company.

Further, the dividend appears to be completely secure. While its net income was down, its free cash flow was up to $1.17 billion last quarter, up from $1.05 billion year over year. While the yield is relatively small at 1.81%, the company has been aggressively increasing it. In January 2015 it increased it by 25%, and last January it saw a 20% increase.

So long as earnings stay strong, the dividend is going nowhere because its payout ratio is only 30%. And if the company can start earning more money, I expect this stock will turn into a dividend juggernaut.

The exclusive buy "signal" you can't ignore

Over the course of The Motley Fool U.S.'s 23-year history, this rare buy "signal" has generated massive wealth for those that have been smart enough to pay attention to it. It's so rare, that it's happened less than two dozen times... but when it does, it's made investors undoubtedly rich. If you're interested in knowing the stock behind this rare buy "signal"--and you're excited to take advantage of this golden opportunity, then you're going to want to read this. Click here to unlock all the details behind this new recommendation from Stock Advisor Canada.

Fool contributor Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.