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Buy and Forget: Canadian National Railway Company

There is no better long-term investment to make than in the railroad industry, and Canadian National Railway Company (TSX:CNR)(NYSE:CNI) sits at the top of the list of railroads to invest in.

Incredibly, railroad investments are often overlooked by investors, as they are stereotypically perceived as legacy companies from a long-passed era of commerce, viewed as slow, inefficient, and out of touch with the modern economy.

That couldn’t be further from the truth. Let’s dispense with some of those fallacies by outlining why railroads, and Canadian National in particular, should be part of your portfolio.

The railway moat

Railroads offer an incredible defensive moat. Rail tracks are scattered around the continent, connecting coasts, cities, and industrial regions in a massive network not unlike a network of arteries.

Canadian National’s development of railroad tracks has made it difficult, if not impossible, for a new competitor to stake a claim and offer an alternative. Canadian National has one of the largest rail networks on the continent and is the only railroad in North America to offer access to three different coastlines.

If a competitor were to emerge, it would cost tens of billions in land acquisitions alone to plot alternate freight routes, and then construction would take upwards of a decade and cost just as much, if not more.

Mergers, which is the other way a competitor could emerge to counter Canadian National’s dominance, seem just as unlikely to occur. Following a streak of mergers in the 90s, the Surface Transportation Board (STB) set out a series of strict rules and guidelines for future mergers between class one railroads.

As a result of those guidelines, mergers have all but ceased, and attempts to merge have been met with concerns from multiple regulatory bodies.

Canadian National is a highly diversified means of hauling freight

There are few more impressive displays of engineering to witness than a train that is over a kilometre long hauling over 100 cars of freight. What’s even more impressive about that display is the sheer number and types of freight that are being hauled.

Canadian National’s freight is a highly diversified mix of products ranging from automotive parts and coal to fertilizers, wheat, and oil. The benefit of this diversification is that Canadian National can adjust the specific freight based on demand, so that a slowdown in one area of the economy, such as oil, could be offset by another increase, such as the seasonal demand for wheat.

Apart from the diversified mix of freight, Canadian National has a significant portion of its network and revenues stemming from within the U.S., providing yet another way in which the company can offset a slowdown in one area with a boost in another.

Canadian National is a great income and growth stock

Most investors shy away from Canadian National as an income stock, noting the 1.61% yield as nothing spectacular when compared to other options on the market.

What that yield does not reveal to investors is the compound annual growth rate of the dividend, which, over the past two decades, has inched closer to a very impressive 16%.

In terms of stock growth, in the past 12-month period, Canadian National has surged 25%, which has been largely thanks to the company reporting better-than-expected results during earnings season.

Results for the recently announced second quarter saw the company post net income of $1.03 billion — a massive 20% gain over the same quarter last year. Revenue in the quarter surged 17% in the quarter as well, fueled by an increase in carloads and rise in revenue tonne lines.

In my opinion, Canadian National is a great buy-and-forget stock that should be part of every portfolio.


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Fool contributor Demetris Afxentiou 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.

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