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This Dividend Stock Is Crushing the Market: Canadian National Railway Limited

As I’ve said many times, my favourite part about dividend investing is that it’s predictable.

Case in point: Canadian National Railway Limited (TSX:CNR)(NYSE:CNI).

In a column last December, I identified the Montreal-based company – which owns one of the largest rail networks on the continent – as one of three stocks that would hike their payouts in 2015.

I’m pleased to report that CN did not disappoint. Even as others are bracing for a slowdown, the country’s largest railroad announced a 25% dividend increase earlier this week — the biggest hike in the firm’s history.

Surprised? You shouldn’t be. Since paying its first dividend in 1995, CN has shown a commitment to rewarding shareholders. Management has hiked the company’s payout for 19 consecutive years, through recessions, inflation, wars, and assorted financial panics.

The past five years — where pipeline constraints have made CN the go-to shipper of oil — have been especially rewarding for dividend investors. Over that time, the company’s payout has more than doubled to an annualized rate of $1.25 per share from $0.54 in 2010.

While shareholders shouldn’t count on such exceptional growth going forward, most analysts do expect more dividend hikes in the future.

Where will this growth come from? Last quarter, the company saw big gains in shipping petroleum, chemicals, grain, fertilizers, metals, and minerals. Intermodal transport climbed 13% year-over-year. Automotive shipments showed gains of 12%.

Another part of CN’s success can be credited to management’s ability to control costs. The company’s operating ratio for the quarter — which simply divides operating expenses by revenues — came in at 60.7%, down more than four percentage points year-over-year. We can expect that ratio to continue falling as the company finds more ways to cut expenses.

“Our agenda of Operational and Service Excellence is clearly working.” President and Chief Executive Officer Claude Mongeau said in a press release, “We see continued opportunities for growth in energy-related commodities, intermodal traffic, and commodities tied to U.S. housing construction, automotive sales, and other consumer spending.”

Is CN a slam dunk? No. If oil prices keep falling, the boom in energy-related transport could disappear. That said, you can expect this to be at least partially offset by lower fuel costs.

Another risk is a recession. When business slows down, there’re a lot fewer goods being shipped back and forth. That would put a big dent in CN’s profits.

Risks aside, the population is still growing. Over time, those people will demand an ever increasing number of products. CN will play a critical part in moving those goods around the country.

That likely means more dividend hikes for shareholders.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul 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 is a recommendation of Stock Advisor Canada.

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