One year ago, I wrote a bullish column on Canadian Pacific, calling it a “well-managed company” with “healthy cash flow generation and good growth prospects.”
Since then, the stock has appreciated nearly 40%. Even though the share price has increased substantially, I have no plans to change my recommendation. If anything, I would consider adding to a position on any weakness.
1. Canadian Pacific has a big wide moat
When you have a profitable business, it’s like being the king of an economic castle. The nature of capitalism is that people always want to take your crown. What you need is some sort of durable competitive advantage, like a moat, that protects the business.
CP has a moat a mile wide filled with angry mutant sharks. Its rail lines were laid nearly a century ago, back when land was cheap. But over time, cities, towns, and businesses have been built around these tracks.
Imagine if you and I tried to rebuild CP’s railway from scratch. Even if we could scrape together a few billion bucks, there’s no way we could buy out all of the landowners or secure the needed right-of-ways.
That means the company’s network of track is almost impossible to replicate. As a result, CP is able to crank out oversized profits year after year without the worry of new rivals eating into margins.
Railroads like CP are also the cheapest mode of transportation over land. One rail car can hold up to 100 tons of freight. You would need four tractor-trailers to ship that much by truck.
This gives rail a permanent cost advantage. Therefore, as long as we’re moving products around this country, CP is going to get a piece of the business.
2. Canadian Pacific is a bet on Canada
That makes CP an all-in bet on Canada’s economic future, and I have always considered a wager on ever-rising Canadian prosperity to be pretty much a sure thing.
Indeed, who has ever benefited during the past 148 years by betting against Canada? During that time, the nation’s real output per-capita has increased more than tenfold. I don’t expect the next 100 years to be much different.
Of course, there will be bumps along the way. Over the next century, we can expect 15 or so bad years, and I have no idea what order they’ll appear.
But over the next 100 years, we’re going to have more people living in this country. Over time, they’re going to use more goods. CP will play a vital role in moving those products across the nation.
3. Canadian Pacific pays a growing dividend
For shareholders, this should translate into a growing stream of dividends.
Since going public in 2001, the company’s payout has increased by nearly threefold. Even through the worst of the financial crisis, CP never skipped a single dividend payment to investors.
And this might just be the beginning. Over the past few years, CP has done a great job at trimming costs and reconfiguring its network to boost profits. I expect this will result in many more dividend hikes for shareholders.
Bottom line, CP is a wonderful business that deserves a permanent spot in your portfolio. I expect patient shareholders will almost certainly be rewarded with growing profits, dividend payments, and a stock price that—though unpredictable in the short term—should gradually rise over time.