Are Railroads Still Viable Investment Options?

Canadian National Railway (TSX:CNR)(NYSE:CNI) offers investors a unique mix of growth and income from a well-diversified and stable business.

| More on:
railroad

There is no other method of transporting freight as economically, safely, and quickly than by rail. Canadian National Railway (TSX:CNR)(NYSE:CNI) is the largest railroad in Canada and the second largest on the continent, with an impressive network of over 30,000 kilometres that spans from coast to coast as well as cutting down the U.S. Midwest to Gulf Coast region.

So, what makes Canadian National a great investment? Here are a few key reasons to consider.

Canadian National has two impressive moats 

It’s no secret that railroads have impressive moats that are among the most untouchable assets across the entire economy. Following a series of mergers in the 90s, the Surface Transportation Board (STB) established a set of rules and guidelines for mergers of large class one railroads, of which there are seven remaining on the continent. As a result, further consolidation in the railroad sector, particularly among the larger railroads, will meet increased criticism and pushback from governments and regulatory agencies on both sides of the border. The attempted merger of two of Canadian National’s peers just a few years ago is a prime example of this.

The second point worthy of note is Canadian National’s exposure to a third coast. No other railroad on the continent can offer that level access, which places Canadian National in a prime position above its peers.

Canadian National is a solid performer

Over the past five-year period, the stock has more than doubled to the current stock price of just over $107. Additionally, despite being close to the 52-week high, there’s still more room for Canadian National to grow further.

While a major slip on deliveries and meeting commitments resulted in the company missing expectations in the last quarter, there are two important facets that investors should keep in mind.

First, the slippage over the past winter was attributed to a particularly harsh and long winter that put extra strain on an already crowded system. The delays resulted in Canadian National meeting just 17% of its orders in February. Even worse, that winter delay followed what was an unusually plentiful harvest from the previous season. This put an added emphasis on the delays from winter, as farmers were left with their product to load, but there was no train in sight.

Finally, despite the seasonal nature of those delays, Canadian National has made a real movement toward minimizing these and other issues from occurring again. The company first leased an additional 130 locomotives and additional crew to boost capacity and clear the backlog, and it then committed additional funds for developing the infrastructure in the west of the country further.

Overall, the railroad has invested a whopping $18 billion in capital investments and upgrades over the past eight years.

Canadian National rewards investors

At first glance, the 1.79% yield that Canadian National offers through its quarterly dividend may not seem that enticing, especially considering some of the incredible dividend yields in the market currently.

What those investors are forgetting is the incredibly stable and secure nature of Canadian National’s business as well as the impressive history the company has established in hiking the dividend over the years.

In my opinion, Canadian National remains an excellent long-term holding for investors looking to diversify their portfolios and build their nest eggs.

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