How This Railroad Can Make You Rich

Canadian National Railway (TSX:CNR)(NYSE:CNI) just got over a difficult winter, but long-term prospects for the railroad are stronger than ever.

| More on:
The Motley Fool

One of the most interesting aspects to take into consideration when considering an investment is how that investment could benefit from or be a detriment to other related areas of the market.

The housing market, for example, could be a boom-or-bust factor for banks, depending on how exposed the bank is to the mortgage market. Over time, this has contributed to some banks seeking to expand outside their traditional market to diversify their holdings and create a hedge against a potential drop in business at home.

One such intriguing investment is the railroad sector — more specifically, Canadian National Railway (TSX:CNR)(NYSE:CNI).

Aren’t railroads low-tech holdouts from last century?

This is the most common — and untrue — statement to make regarding railroads. Railroads are technically technology from well over a century ago; track networks originally placed in the early days of Confederation traverse the entire continent and have led to communities being built around those railroad tracks.

In other words, railroads, no matter how old, still have an incredible moat.

In a similar vein, we place little thought into a long freight train passing by, apart from its length, completely disregarding the sheer amount of freight hauled and the distance that freight is traveling. In fact, rail freight constitutes over 40% of all freight traffic in the U.S., hauling everything from automotive supplies and raw materials to crude oil and wheat from one edge of the continent to another.

Why Canadian National?

Canadian National is the largest railroad in Canada and one of the largest on the continent. Apart from the natural moat that comes with any railroad, Canadian National is the only railroad with access to three coastlines, thanks to its massive 32,000 km network from coast to coast and through the U.S.-Midwest to the Gulf Region.

That network boasts access to 75% of the U.S. population and is a key point in Canadian National being able to haul $250 billion worth of goods each year.

In some ways, Canadian National acts as a vein to the overall North American economy.

The opportunity for investment

The benefits of investing in Canadian National are neither new, nor are they unheard of. Canadian National is mentioned frequently as a great dividend investment, owing in part to its strong growth and stable business, which consistently outperforms the market.

While that 1.94% yield seems attractive, the real benefit comes in the form of the opportunity presented through a myriad of unrelated events.

This winter has been exceptionally harsh and cold, which has led to a series of shipment delays. Compounding this is the fact that the harvest from last fall was much better than expected. As a result, a growing number of farmers were left waiting for a freight car to arrive to ship their goods to the markets. During this past February, that backlog became so extreme that Canadian National met just 17% of its orders.

For Canadian National, a company known as a leader in efficient operations, this was a significant blow, ultimately contributing to the departure of its CEO.

These events have had a profound effect on the stock, which is currently trading near 52-week lows in the sub-$100 range.

Thankfully, the winter weather plaguing the entire rail industry has finally subsided, and the trains are running again. Canadian National has identified several areas to improve, including setting aside $250 billion for track and infrastructure improvements in the west of the country as well as leasing 130 locomotives to clear any remaining backlog.

While the delays were seasonal, the opportunity for investors is not. Canadian National currently trades at a ~10% discount, making this an excellent opportunity to pick up a great stock at a discounted price.

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 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.

More on Dividend Stocks

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 »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »