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CN Rail (TSX:CNR) Ongoing Labour Issues Elevate Investment Portfolio Risks

Labour disputes are a common phenomenon in capitalism, and many jurisdiction will have their fair share of industrial actions in one sector or another as economic players tussle for more portions of the economic cake.

In the case of an ongoing Canadian National Railway’s (TSX:CNR)(NYSE:CNI) labour strike, however, the disruption can be costly to everyone, including stock investors.

CN Rail prides itself as an over 100-year-old backbone of the Canadian economy that transports over $250 billion worth of goods annually for several business sectors across the country and mid-America. When this key rail transporter’s 3,200 employees went on strike last week Tuesday, several industries faced challenges.

Labour unrest is a serious concern in industries with a strong unionized workforce. Long hours, fatigue and purported dangerous working conditions are the reasons for the CN Rail strike.

News of a potential propane shortage affecting Ontario, Quebec and the Maritime Provinces could be disturbing. Farmers may fail to dry grains in time and the situation is difficult for the agriculture industry, where 90% of grain produce can be expected to be transported by rail. The strike occurred just as farmers needed services.

Reports claim that the industrial action at CN Rail could cost the economy of over $3 billion in lost production and profits by the first week of December.

The mining, farming, forestry and oil production industries could be hit the hardest, but loses could creep into several other sectors as the transporter also handles manufactured goods and consumer products.

It’s unfortunate for Alberta’s oil producers, who had celebrated a partial lifting of a production curtailment directive by government for production that would be transported by rail are getting frustrated as the key railway operator transported more than half of the country’s crude-by-rail in September.

Crude oil inventory build-ups at terminals will exert pricing pressure on heavy oil, and price differentials on Canadian oil may widen significantly, costing the energy industry. The pain experienced during the fourth quarter of 2018 hurt oil industry cash flows and industry stocks were beaten down.

Can such risks be diversified away?

Labour unions are present in most industries, but activity and extent of worker disgruntlement will always be different. One may go with tech stocks, as labour strikes aren’t very common there, as in most other service industries (excluding transport.)

That said, for a balanced, diversified investment portfolio, it may not be a wise decision to concentrate holdings in a few sectors only for the fear of labour unrest that doesn’t always happen. Some exposure to oil, mining, and agriculture related industries could improve a stock portfolio’s risk and reward trade-off profile.

To the extent that industries feed into each other, the type of labour dispute at CN Rail could cost the whole economy in lost profits, production and working time that may never be recovered, and such dead weight losses may later affect investor groups in distantly related sectors.

Perhaps would be wise to diversify across national borders, but that could come with added due diligence costs, currency risks and geopolitical risk exposures that one may not be ready to face. As history has shown, however, some risks could be universal and simply need managing.

Investors probably shouldn’t lose too much sleep over labour-related risks, as these issues ultimately get resolved, but CNR may have to accept some labour cost increases if there are any worker compensation issues in the background, hurting its cash flows and profits of the dividend growth stock.

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Fool contributor Brian Paradza has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

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