With its rail network, Canadian National Railway Company (TSX:CNR)(NYSE:CNI) has delivered double-digit earnings growth even as the company faces challenges. Let’s review what the company has achieved thus far this year.
So far this year…
Compared with the same period in 2014, in the first quarter of this year Canadian National Railway achieved earnings growth of 30%, but experienced lower coal volumes, with carloads decreasing by 8%.
In the second quarter its coal volume worsened. Thankfully, coal only makes up 5% of operations. However, grain, crude, and metals and minerals also showed weaker volumes in the second quarter. Still, Canadian National Railway managed to achieve earnings growth of 12% compared with the same period in 2014.
The company continues to generate strong free cash flow. In the first half of the year it generated $1,051,000 of free cash flow. At the same time, it paid out about $509 million of dividends year-to-date. So, Canadian National Railway’s dividend is well covered.
Dividend and share buybacks
Canadian National Railway continues with its share buyback program that was announced on October 21, 2014 to retire up to 28 million shares. From the end of 2014 to the present, nine million shares have been retired. So, even if shareholders are not buying more shares, their stakes in Canadian National Railway are still growing.
At the same time, the railway has increased its dividends for 19 consecutive years. In its second-quarter report, the company states it’s gradually expanding its payout ratio to 35%. Using its quarterly dividend of 31.25 cents, and the company’s forecast of $3.76 for its adjusted diluted earnings per share, that implies a conservative payout ratio of 33%.
In the CIBC 14th Annual Eastern Institutional Investor Conference on September 17, Luc Jobin, Canadian National Railway’s executive vice president and chief financial officer since 2009, reaffirmed that the company is continuing the buyback program and is committed to increasing its dividends.
Valuation
Based on adjusted earnings, the company is trading at a price-to-earnings ratio (P/E) that is below April 2014 levels, when the company was priced around $60 per share. Currently, Canadian National Railway is trading below a P/E of 18, which is a rare opportunity for a double-digit-growth company.
In conclusion
Even with softer demands in the near term, Canadian National Railway remains a disciplined company. If in periods of soft demand, it’s able to grow earnings at low double digits (or even if it hits high single digits), imagine what it can do when the demand bounces back. So, priced around $72 and with a P/E under 18, Foolish investors can start buying this company for long-term growth.
