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Canadian National Railway Company: Is it Time to Hop on This Profit Train?

Canadian National Railway Company (TSX:CNR)(NYSE:CNI) is catching a nice tailwind right now, and new investors are wondering if this is the right moment to start a position in the stock.

Let’s take a look at the current situation to see if CN deserves to be in your portfolio.

Earnings

CN reported Q2 2015 net income of $886 million, or $1.10 per share, up from $1.03 per share in the same quarter in 2014. Operating income increased 8% despite a 3% drop in carloadings and a 7% reduction in revenue ton-miles. Revenues for the quarter were essentially flat compared with Q2 2014.

The numbers came in slightly better than expected and investors really got a chance to see the importance of CN’s diverse business segments as well as its U.S.-based revenue stream.

Revenues for automotive products increased 17% and forest products jumped 8%. This helped offset weakness in some of the commodity-related freight. Revenues for metals and minerals dropped 5%, grain and fertilizers slid 7%, and coal revenue plummeted 26%.

In the energy sector, the company saw decreased demand for the shipment of crude oil, frac sand, and drilling pipe.

Weak commodity markets have resulted in a drop in the Canadian dollar against its U.S. counterpart. CN gets a significant amount of its revenues in U.S. dollars and that had a positive Q2 impact of $64 million, or $0.08 per diluted share.

Efficiency

Management is doing a good job of controlling costs in the areas where it is seeing weaker demand. Operating expenses in the quarter dropped by 5% and the company’s operating ratio for Q2 2015 came in at an impressive 56.4%, a 3.2-point improvement over the Q2 2014 number of 59.6%.

Dividends and share buybacks

CN pays a dividend of $1.25 per share that yields about 1.5%. Investors shouldn’t be put off by the low yield because the company has a strong history of dividend growth. Management hiked the payout by 25% earlier this year and increased its target payout ratio to 35%.

CN also buys back a lot of shares. In the second quarter the company repurchased $404 million in stock.

Should you buy CN?

The company faces some economic headwinds in Canada, but the overall picture looks good. Management just reconfirmed its outlook for double-digit adjusted EPS growth in 2015 versus the $3.76 earned last year, and investors still have a chance to pick up the stock at a reasonable 17 times forward earnings.

If you are looking for a multi-decade investment that you can simply buy and forget about, CN is certainly a top choice.

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Fool contributor Andrew Walker 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.

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