As is often the case, investors regularly ask for more than what they are offered. When a dividend yield is 1% and is expected to double in each of the next two years, the 1% is not enough. Instead, it takes a 4% yield in addition to the potential for capital appreciation to make an investment attractive.
Fast forward two years, and investors sitting on the other side start to complain: the dividend is good, but where is the opportunity for capital appreciation?
The bottom line is that there is always someone who isn’t happy!
For those who are willing to accept the fact that opportunity presents itself during a storm, there is good news to be had. At less than $95 per share, Canadian National Railway (TSX:CNR)(NYSE:CNI) offers incredible potential to long-term investors who are willing to buy and hold for a long time. At the current price, buyers will receive part of a unique asset that cannot be replicated. Until revenue and profit increases resume, the compensation to remain patient is close to 2%.
As a point of comparison, the Government of Canada 10-year bond yield is approximately 2.1% and is locked in for the entire period. For investors willing to take a small amount of risk, there is very little rationale for placing one’s money with the government to receive a return that will closely match inflation over the next decade. Instead, shares of Canada’s largest railway offer almost the same return (in a much more tax-efficient manner for non-registered accounts) with the potential for both a dividend raise and capital appreciation.
For investors who are wondering why this name looks so good, the elephant in the room is very clear: President Trump wants to renegotiate NAFTA, which may have a very negative effect on this Canadian railroad, which depends on the movement of goods to generate revenue. As is often the case, investors are afraid and losing optimism. If we’ve learned anything from watching the drama unfold over the past year when watching our neighbors south of the border, it’s that the outcome has been substantially better than expected. The actions taken by the president (at least from a business perspective) have delivered value to the economy.
With revenues and net income that have increased over the previous year, the question that investors need to ask themselves is just how long they are willing to remain patient to see this story unfold. When considering the capital returned to shareholders, Canada’s largest railroad has done a fantastic job in undertaking a share buyback, thereby making it easier to raise the dividend. Since the end of fiscal 2015, the company has reduced the total number of shares outstanding from 800 million to 754 million as of the end of fiscal 2017.
Given fewer shares outstanding, the total savings (on the dividend payments) have been close to $87 million!
As long as this train stays on the tracks, revenues and earnings can still hit the pause button, while the share price will be able to continue down the tracks. Sometimes you find what you are looking for: an A+ business!
