An emerging trade war between the U.S. and China continues to dominate headlines and generate fear in financial markets. The TSX, along with most other major markets has come off the boil and there are concerns that if a full-blown trade war emerges, global gross domestic product (GDP) could decline by up to 1% to 2%.
While there will certainly be fallout from the Trump Administration ratcheting up tariffs on a further US$250 billion of Chinese goods and Beijing’s reprisals, it is likely that the situation will be defused.
Furthermore, the market’s response appears overbaked and the impact on high-quality stocks with almost impenetrable economic moats will be negligible. One stock such stock that’s an attractive investment is Canadian National Railway (TSX:CNR)(NYSE:CNI).
The leading North American railway company is known as a Dividend Aristocrat for good reason and reported some solid first-quarter 2019 numbers, highlighting that it is delivering value for investors.
Those robust results include revenue expanding by 11% year over year to $3.5 billion and an 8% increase in diluted earnings per share to $1.08. The key drivers of that improved financial performance were higher freight rates and increased volumes of petroleum, grain and coal.
Rail freight revenue per revenue ton mile grew by a healthy 8% year over year to $5.78, while rail freight revenue per carload soared by 11% to $2,407. Revenue generated from the transportation of petroleum rose by a notable 30% compared to a year earlier, coal rose by 15%, metals surged by 9% and grain by 7%.
There is every indication that growth trajectory will continue over the remainder of 2019.
A combination of growing oil production, Alberta winding back its mandatory production cuts and existing pipeline capacity constraints will drive greater demand for crude by rail.
Increased mining activity will also bolster demand for Canadian National’s freight services as coal and metals output expands.
It is the railway’s transportation of coal, metals and minerals along with its intermodal freight business which would be impacted by a full-blown trade war.
Economists believe that an all-out trade war could slice a full percentage point off China’s GDP, and the part of the East Asian nation’s economy that will be hardest hit is its expansive industrial sector.
That sector is the world’s single largest consumer of metals and coal, which means that if the trade war escalates that miners and those providing transport infrastructure could be among the worst affected.
Canadian National only earns 17% of its revenue from shipping coal and metals, so if there were a steep decline in demand the overall impact would be minor, especially once it is considered that growing demand for crude by rail will offset that decline.
There will also likely be no decline in revenue from intermodal because U.S. tariffs will force Chinese manufacturers look to other markets such as Canada.
Putting it together for investors
Remember that rail remains the only economic means of transporting bulk freight. That coupled with Canadian National’s transcontinental network and the steep barriers to entry for what is a heavily regulated and capital-intensive industry endows it with a wide almost impenetrable economic moat.
Those characteristics minimize competition and virtually guarantees the company’s earnings will continue to grow. They also help insulate Canadian National from the fallout that a full-blown trade war could create, making it a long-term buy and hold stock that belongs in every portfolio.
The railway company has a long history of rewarding investors through a steadily growing dividend payment, having hiked it for the last 23 years straight, giving it a yield of almost 2%.