Building a comfortable retirement is the ultimate goal of most investors. The question is, how do we do this? Which investments will serve this purpose, and what should we look for to build our retirement stock portfolio?
Canadian National Railway (TSX:CNR)(NYSE:CNI) embodies most of what we should look for when building our retirement portfolio. The company has a wide moat, little competition, and a business that is essential to the functioning of the Canadian economy. The Canadian railways transport more than $250 billion of goods annually from a diversified list of sectors, such as the resource sector (grain, crops), crude oil, manufactured products, and consumer goods.
Let’s take a closer look at why Canadian National Railway stock can help you build a comfortable retirement.
Canadian National Railway is the backbone of the economy
As previously mentioned, Canadian National Railway is the backbone of the Canadian economy, transporting essential goods that keep the economy humming. While the company’s results will fluctuate with the economy, costs have been driven down to such low levels that this company makes good money, even in difficult times.
In the long term, demand is sustainable, and CN’s diversified exposure to different goods and commodities will shelter results from weakness in any one area. With a very healthy balance sheet, continued efficiency initiatives, and the adoption of smart technologies in the future, we can see how CN Rail will continue to thrive on both a top-line and bottom-line basis.
This will all continue to translate into strong free cash flow growth, and returns on equity well north of 20%, which will continue to translate into strong performance for CN Rail stock.
Crude by rail to drive demand
These days, shipping crude by rail has been a growing trend, as oil companies attempt to circumvent the lack of pipelines and get their crude delivered and meet the demand that they are seeing. In fact, the pipeline capacity problem is so severe that companies such as Cenovus Energy and Imperial Oil are looking into altering their bitumen in ways that would make it easier and cheaper to transport via rail. This would dramatically reduce the cost of shipping by rail, making it almost as cost effective as shipping via pipelines.
Canadian National’s CEO has singled out crude-by-rail shipments in the company’s latest conference call, saying that these shipments may provide strength to the company’s results in 2020. Over at CP Rail, crude-by-rail shipments are at the highest level ever, with 2020 expected to see continued strength. As the Alberta government lifts production curtailments while pipeline capacity remains insufficient, it is easy to see how this demand will continue to rise.
Valuation looks good
Canadian National Railway stock is not cheap, but looking at the strength of the company’s business and financials, it is easy to justify paying up for such high quality. The return on equity is closing in on 25%, free cash flow currently stands at $1.5 billion and is expected to grow significantly over the next few years, and dividends paid have been reliable and growing.
Foolish bottom line
Canadian National Railway stock is suitable for a retirement portfolio, as it acts as an anchor that is protected by its strong and almost untouchable competitive position, its strong balance sheet and cash flow generation, and strong returns.
Start building your retirement wealth with CN Rail stock and watch it grow for years to come.
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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 Karen Thomas 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.