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Do Railroads Still Warrant a Position in Your Portfolio?

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Railroads are often viewed by many as remnants of the last century. The unbelievable sight of a freight train spanning over a kilometre pulling hundreds of freight cars seems incompatible with our modern, hi-tech views of the economy.

Let’s talk a bit about what that stereotype means for railroads such as Canadian National Railway (TSX:CNR)(NYSE:CNI), and if the railroad still belongs in your portfolio.

Canadian National is still chugging along

Canadian National is Canada’s largest railroad, with an impressive network that stretches from coast to coast and then down through the American Midwest extending to the Gulf Coast. The impressive network remains a valid bragging point for the railroad, as Canadian National is the only railroad on the continent that has access to three coastlines. This also means that Canadian National has access to nearly every major metro area along that route, hauling goods to ports and warehouses with ease.

Canadian National hauls nearly every type of freight. From automotive components and vehicles to raw materials, crude oil, and wheat, Canadian National casts a wide and diversified net across the entire North American economy. Rail freight is still responsible for hauling more freight than any other type of freight, making railroads a core artery of the North American economy. In the case of Canadian National, that amounts to a whopping $250 billion in goods annually.

Further to this, Canadian National can offset a slowdown in one freight segment by ramping up another, while still remaining well diversified across its network.

In other words, despite the stereotypical view that railroads have no place in a modern economy, they still play a significant role.

Weaker results: Should you worry?

Concerns around Canadian National were aired earlier this week, as the railroad reported disappointing results for the fourth quarter. The results, which were inclusive to December 31, included a week-long strike that transpired in November and lower demand for freight.

During the quarter, Canadian National reported revenue of $3.58 billion, which fell short of the $3.81 billion reported in the same period last year. The drop was attributed both to the strike as well as lower revenues across freight segments. Both petroleum and chemical shipments saw a 7% drop in revenue, while grain and fertilizers saw a 6% dip. Some of that drop was offset by an 8% gain in container shipments.

In terms of earnings, the railroad earned $1.25 per diluted share, which was a whopping 16% drop over the same quarter last year, where Canadian National earned $1.49 per diluted share. Despite that drop, the railroad still managed to beat analyst expectations of just $1.20 per share.

Final thoughts: Should you buy?

Canadian National, much like its trains, will continue chugging along. The disappointing results may have been cause for concern for some, but those investors who recall the bitterly cold winter we saw last winter that wreaked havoc on Canadian National’s delivery schedule and results will also recall how the railroad bounced back in the next quarter.

It’s not out of the ordinary to expect Canadian National to bounce back this time too. The company continues to invest in improvements such as its capital-improvement program, with $3 billion earmarked for capital expenditures this year. In prior years, those funds were used on a variety of different programs, such as signal improvements, new locomotives, and staffing additions.

Finally, there’s Canadian National’s dividend. The quarterly payout currently provides a yield of just 1.74%, which hardly qualifies as one of the better-paying dividend stocks on the market. What that yield does not reveal, however, is the handsome annual upticks that the railroad provides as well as the impact of the incredible growth we’ve seen from the stock in the past decade.

By way of example, Canadian National recently announced a 7% hike to the dividend, which, when factoring in the double-digit annual gains we’ve seen from the stock over the past decade, paints an entirely different view of that dividend.

In other words, buy it, hold it, and enjoy the trip.

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 owns shares of Canadian National Railway. 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.

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