Strong companies can trade sideways even when they experience headwinds. This is exactly what has happened with Canadian National Railway Company (TSX:CNR)(NYSE:CNI).
Range-bound or overpriced?
Since the start of 2015 the railroad leader has been range-bound, trading between roughly $72 and $83. The railroad’s business performance is affected by the health of the North American economy.
The company transports items such as intermodal containers, automotive, fertilizers, forest products, metals and minerals, petroleum, and chemicals, etc.
When Canadian National traded close to $87 per share in February 2015 at a price-to-earnings ratio (P/E) of more than 22, the company was still experiencing double-digit growth. In 2015 the railroad company delivered earnings-per-share growth of 18%.
However, the company expects this year’s earnings per share to be the same as last year’s, indicating no growth. So, the shares are actually a bit overpriced at a P/E of about 18.9.
The far-reaching network
Canadian National has an irreplaceable network of about 32,000 km, which spans Canada and parts of the United States, connecting North American customers to global markets through nine ports on three coasts.
What’s holding up the shares?
Canadian National provides a needed service of transporting products from point A to point B through its unique network. It’s also a quality company with a strong balance sheet and an S&P credit rating of A.
The railroad leader has a track record of double-digit return on equity that ranged from 17% to 25% in the last decade, indicating that it puts capital to good use.
The company also continues to improve its efficiency. For example, in the first half of the year Canadian National has improved its car velocity and train productivity while maintaining safety.
Most importantly, Canadian National is devoted to rewarding shareholders with a higher dividend every year. It has done so for 20 consecutive years. In the last five years the company has increased its dividend at a compound annual growth rate of 18.3%.
The company yields 1.8% at $84 per share, and its payout ratio is just under 34%. The current dividend yield of 1.8% is small, but the company is likely to continue maintaining its dividend-growth streak next year and into the future.
Conclusion
Canadian National Railway is an essential part of the economy, and it has a strong track record of rewarding shareholders with double-digit dividend growth.
However, the company is expected to experience slow growth in the near term. So, interested investors should rethink paying a P/E of 18.9. Instead, it’ll be a better value at a P/E of 16.5, which translates to roughly $73.60 per share. That will be a good place to start averaging in.
