Canadian investors are using self-directed RRSP and TFSA accounts to complement their employment and government pension programs.
The strategy is becoming more popular, now that trading fees are reasonable, and investors have access to a much broader information base than in the past. Research is easier to conduct on specific companies or industries due to the online posting of quarterly and annual reports, and the variety of digital tools available to help people make better investing decisions has increased in recent years.
CN plays an important role in the Canadian and U.S. economies, transporting commodities, parts for manufacturing, and finished goods destined for domestic consumers and international markets. With tracks that connect three coasts, the company has a unique position in the North American rail industry and enjoys a significant competitive moat.
To ensure it remains at the top of its class and meets growing demand, CN is investing in 200 new locomotives and significantly increasing its fleet of rail cars. In addition, CN is spending on network upgrades and yard improvements to ensure the business operates as efficiently as possible.
These are expensive initiatives, and they use up a large part of the profits, but CN is a free cash flow machine, and investors continue to receive generous dividend increases. CN raised the payout by 10% in 2018 and has one of the best compound annual dividend-growth rates in Canada for the past two decades. The current payout provides a yield of 1.6%.
Strong economies in Canada and the U.S. bode well for CN and its investors. Once the new trade deals are in place between Canada, the United States, and Mexico, the stock could pick up a tailwind.
Nutrien produces potash, nitrogen, and phosphate for the global crop nutrients market. The company is an important CN customer, and that relationship should expand in the coming decades as fertilizer demand increases. Global population growth means farmers need to get better yield from their land, and fertilizer is a key part of the equation. Nutrien also has a retail division that sells seed and crop protection products to farmers around the globe.
The integration of the former Potash Corp. and Agrium assets continues, and Nutrien is already seeing benefits that are exceeding the original guidance. The company reported achieving $246 million in run-rate synergies in the first half of 2018 and expects see the metric hit $350 million by the end of the year, well ahead of the $250 million the company anticipated.
A recovery in fertilizer prices is providing a nice boost to margins, and Nutrien has upgraded its 2018 outlook as a result.
The company currently pays a US$0.40 per share dividend, and that should steadily increase in the coming years. At the time of writing, investors can pick up a yield of 2.9%.
Is one more attractive?
CN and Nutrien are both leaders in their respective industries and should deliver steady long-term growth. If you only choose one, I would probably make Nutrien the first pick today. The stock carries more risk, but the market might not be pricing in the potential free cash flow bonanza the should be on the way if crop nutrients prices continue to improve.
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.
David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Fool contributor Andrew Walker owns shares of Nutrien. Canadian National Railway and Nutrien are recommendations of Stock Advisor Canada.