Investors are constantly looking for companies that are going to act as a foundation for their portfolio for years and sometimes even decades to come. But when I see some of the companies that they are holding, it looks more like a bundle of twigs rather than a concrete foundation. And the truth is it’s so easy to get wrapped up in the flavor of the week that investors are left scratching their head on what, truthfully, is the best stock for them to own.
When it comes to foundation building, I look for two things. The first is how likely the company can be disrupted. The word disruption in Silicon Valley has become synonymous with a bunch of hackers in a garage taking down a behemoth company with a new wave of technology. Uber has disrupted the taxi; Airbnb has disrupted the hotel market. The second thing I look for is how hard it would be for a competitor to launch a competitive product.
When I look at these two things, it becomes crystal clear that Canadian National Railway Company (TSX:CNR)(NYSE:CNI) is a true, concrete foundation stock for any investor’s portfolio. Let’s break down the two points I made above.
Disruption
For a company to be disrupted, better technology needs to come along to make the former obsolete. I’ve heard people mention that Elon Musk’s hyperloop could disrupt railroads, but I don’t see it happening. While the technology is fascinating and I would love to see it happen, it’s decades away from being implemented. Further, the cost of setting up a true transnational hyperloop would take even longer.
The reality is, for close to two centuries, railroads have been the most efficient way of getting goods across land. The amount of cargo that a single train can carry far surpasses trucks, airplanes, and even drones.
Wide moat
So, we know that the company can’t be disrupted from a technological perspective. What about another company launching a competing railroad? While this is certainly possible, it’s highly improbable. The cost required to place thousands of miles of rail, buy the necessary trains, and everything else that goes into managing a railroad is economically unfeasible.
From an investment perspective, this means that there won’t be nearly as much competition. The last thing a company wants is to compete away its margins. When you’re one of only a few companies doing the service, you don’t have to worry about being the lowest possible price. There is enough business to go around.
Railroads are concrete
The reality is, a company like Canadian National is a concrete investment. Not only will it not be disrupted by new technology, other companies won’t make it compete away its profits. Because of this, I am perfectly comfortable advising people to buy the stock. Not only are you getting a solid company, but you’re getting one that has, historically, rewarded investors with lucrative dividends and plenty of stock buybacks.
The company pays a $1.25 dividend, which is a 1.51% yield. While this might seem low, the company has been increasing the dividend for the past 20 years, which is a great pay-raise for investors.
