It’s not often that I’d advocate that every portfolio should own the same stock, but I genuinely believe Canadian National Railway Company (TSX: CNR)(NYSE: CNI) fits the bill. If Warren Buffett can outright buy a railroad, you should own a piece of one, too.
Railroads are one of the top barometres of the economy. If railroads continue to see demand for shipping, it likely means that there is demand for consumer products, oil, and other goods.
However, when railroads begin to struggle, it’s likely that other companies you invest in will start to struggle a quarter or two later. By paying attention to the railroads, you have insight into where the market may be headed.
Another reason I’m such a bull on railroads — Canadian National in particular — is because the economic moat is massive. In Canada and the United States, there are only eight Class I freight railroad companies, so competition is low. Even better, different regions tend to be controlled by one railroad, adding even more economic security to these companies.
Couple this with the massive investment it would take to launch a new railroad, and you can see that competition is unlikely to change going forward.
Then there’s the network of rails. Unlike other railroads that are bi-coastal at most, Canadian National is the only true tri-coastal railroad in North America. It touches the Atlantic and Pacific oceans, and it goes all the way down to the Gulf of Mexico, which is good for transporting oil to the refineries there.
This also helps with operations. Most railways in North America only touch one of the oceans and sometimes the Gulf. If someone wants to get goods from the west coast to the east coast, they have to switch goods from one railway to another — this wasted time costs money.
We can see that with Canadian National’s operating ratio. In the first half of 2017, it had an industry-best 57.2%. The lower this number goes, the less money the company has to spend per $1 of revenue. Canadian National is habitually the top operating railroad, which ensures it can continue to boost its earnings.
In its Q2 2017 results, the company reported $1.03 billion in net income, which was a 20% increase over Q2 in 2016. Its free cash flow was $811 million, up from $585 million a year prior. When a company is able to keep its operating costs low and increase shipments, strong income growth will follow.
The reality, in my eyes, is very simple: thanks to its strong network which touches three coasts and the ultimate economic moat that comes from having thousands of kilometres of rails, owning Canadian National is a no-brainer. But when you add in the fact that it is one of the best-run railways, it just compounds the reasons why you should buy this stock.
For investors that are looking for income, don’t overlook this stock. Although the yield is only 1.64%, it has had an annualized dividend-growth rate of roughly 16% over the past two decades. The yield may be low, but the dividend is growing as fast as management can boost it.
