Investors Should Add Canadian National Railway Company for Portfolio Stability

Because of its wide moat, diversified and growing business model, and the fact that it is the most efficient railroad on the market, investors should buy Canadian National Railway Company (TSX:CNR)(NYSE:CNI).

| More on:
The Motley Fool

For the average investor looking to create a sound portfolio that will grow with them over the long term, I find that railroads are one of the few investments that offer tremendous portfolio stability. But not just any railroad will do. Investors need railroads that are well run, affordable at present-day prices, and able to continue to grow in the future.

The railroad that I believe investors should look at is Canadian National Railway Company (TSX:CNR)(NYSE:CNI). It is, in my opinion, the top railroad in Canada, and it could very well be the top railroad in North America.

Here are a few reasons why you should buy Canadian National.

Wide moat

Imagine a big castle that you are trying to conquer. Now imagine that the castle has an incredibly wide, deep moat. The wider that moat is, the harder it’ll be for you to conquer that castle.

Railroads have a moat just like that, making it incredibly difficult for a new company to come along and launch a competitive product. The money it would cost to buy the land, build the network of tracks, buy the trains and the cars, and then actually operate everything is incredibly high.

This means that Canadian National doesn’t have much to worry about from competitors. A wide moat is fantastic when looking for portfolio stability.

Diversified and growing business

Despite what people may think, Canadian National is quite diversified. Unlike other railroads that have relied on coal for 10-15% of revenue, Canadian National only gets 5% from coal. That means that Canadian National isn’t hurting along with low coal prices.

Further, Canadian National has a network of diverse customers and geographic diversity, thus giving it the ability to generate revenue all over. One of its most powerful operating advantages is the fact that it is tri-coastal. That means that it can ship goods to and from the Pacific Ocean, the Atlantic Ocean, and the Gulf of Mexico.

Even more, Canadian National is seeing growth at some of these ports. For example, the Port of Prince Rupert, owned by DP World of Dubai, is the world’s fastest-growing port. Canadian National has exclusive rights to be its railroad. On top of that, the port in Mobile, Alabama is currently undergoing work to increase capacity.

Both of these will generate more revenue for Canadian National.

Highly efficient

Another reason Canadian National is a top pick is because it is incredibly efficient. According to its Q2 2015 release, its costs are only 56% of its revenue. This is called its operating ratio, and the lower it is, the better. The more money it costs a company to generate $1, the worse off it is. And Canadian National is the most efficient railroad in North America.

Part of the reason it has been able to have such a low operating ratio is because it recognizes when things are going wrong. From Q2 2015, it has cut 5% in operating expenses with some headcount reductions and hiring freezes. This ensures that the company can continue to grow even when times are rough.

If you want to own a railroad that is secure, growing, and efficient, you can’t go wrong with Canadian National Railway Company.

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 Jacob Donnelly 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.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »