With global financial markets yet again in turmoil, the TSX down by 14% over the last year, and the commodities crunch hurting economies reliant on commodities exports, investors could be forgiven for believing that 2016 is the year to avoid stocks.
This couldn’t be further from the truth.
As a long-term contrarian investor I believe that turmoil in the market creates opportunities for investors, and one that stands out at this time is Canadian National Railway Company (TSX:CNR)(NYSE:CNI). Recent market gyrations now see its share price down by 21% over the last year, making it an attractively priced, long-term investment.
An important consideration when making any investment is selecting companies that have wide economic moats, and there certainly aren’t moats any wider than Canadian National’s.
You see, Canadian National operates Canada’s only transcontinental rail network that spans Canada from coast to coast and goes as far south as the U.S. Gulf Coast. This allows it to reach 75% of North America’s population and markets, giving it a tremendous advantage over many of its competitors.
If this strong market position weren’t enough, it is worth considering that railways are heavily regulated and require tremendous capital investments, making it extremely difficult for competitors to enter the market. This leaves Canadian National and Canadian Pacific Railway Limited controlling a virtual duopoly of Canada’s rail traffic, creating an oligopolistic market that allows them to be price makers rather than price takers.
When this is considered in conjunction with rail being the dominant and most cost effective form of bulk freight transportation, Canadian National’s earnings growth is virtually guaranteed.
The strength of Canadian National’s business can be seen in its latest earnings report, where net income grew by 12% year over year for the first nine months of 2015.
While these key attributes will help to drive solid long-term earnings growth, there are also a range of catalysts that will help to give Canadian National’s bottom line a nice bump over the short term.
These include significantly lower fuel prices thanks to the sharp collapse in crude, which is now trading at a 13-year low. Then there is the favourable effect of a strong U.S. dollar as Canadian National generates a considerable portion of its earnings in U.S. dollars.
It should be noted that the rail industry is facing a number of challenges, the biggest being reduced bulk freight volumes because of the commodities crash and the broad secular decline of the market for coal. Nonetheless, I believe that this will have less of an impact on Canadian National in comparison to its North American competitors, because of its lower dependence on the bulk transportation of coal.
The strength of Canadian National’s economic moat has allowed it to hike its dividend on the back of growing earnings every year since 1996. While its yield of 1.7% may not blow out the lights, the dividend’s extremely impressive compound annual growth rate of almost 16% makes it a compelling investment for investors seeking a steadily growing income stream.
It is hard to pass up Canadian National. I believe it is the top railroad stock in North America. Not only will falling costs and its solid moat allow it to continue posting strong financial results, but I expect its remarkable record of dividend hikes to continue.