Canadian National Railway vs. CP Rail: Here's Which Stock I'd Buy

Canadian National Railway vs. CP Rail: Here’s Which Stock I’d Buy

The North American economy is on the rebound. Investors should look to rail stocks like Canadian National Railway (TSX:CNR)(NYSE:CNI) today.

Ambrose O'Callaghan

Ambrose O'Callaghan graduated with a BA in Political Science from McMaster University. After that, he jumped into the banking world. He worked from the front line to an investment associate role. After that, he found a way to marry his experience and knowledge in the world of banking and finance to his love and passion for writing. Ambrose is a passionate believer in Warren Buffett's value investing model.

Published May 7, 2021 8:00 am EDT

The S&P/TSX Composite Index shed 19 points on May 6. Canada’s economy posted a solid rebound in the first quarter, but there is still unease in the air. Investors have gorged on gains in the North American market since the pullback in March 2020. This may be a good time to exercise caution. Top Canadian rail companies are renowned for their stability. Today, I want to compare Canadian National Railway (TSX: CNR)(NYSE: CNI) and CP Rail (TSX: CP)(NYSE: CP). Which is the better buy? Let’s jump in.

How does Canadian National Railway stock look in early May?

Canadian National Railway is a Montreal-based company that is engaged in the rail and related transportation business. Its shares have dropped 4.3% in 2021 as of close on May 6. However, the stock is up 18% from the prior year. The company released its first-quarter 2021 results on April 26.

Management remained confident that Canadian National Railway was well positioned to drive USMCA growth, as the North American economy rebounds. Operating income rose 9% from the prior year to $1.32 billion. Meanwhile, train length increased by 5% and fuel efficiency improved by 4%. Canadian National Railway said that it was targeting double-digit adjusted diluted EPS growth for 2021.

Canadian National Railway stock possesses a solid price-to-earnings (P/E) ratio of 27. It recently announced a second-quarter 2021 dividend of $0.615. That represents a modest 1.8% yield.

Here’s why you shouldn’t sleep on CP Rail

CP Rail is a Calgary-based company that owns and operates a transcontinental freight railway across North America. Its shares are up 7% in the year-to-date period as of close on May 6. The stock has climbed 50% from the prior year. Investors got a look at its first batch of 2021 results on April 21.

Revenues fell 4% from the prior year to $1.96 billion. However, the first quarter was still a success for CP Rail, as it benefited from strong demand across bulk, merchandise, and domestic intermodal. Adjusted diluted earnings per share rose 1% year over year to $4.48. CP Rail is projecting double-digit adjusted diluted EPS growth over the previous year. Meanwhile, it anticipates high single-digit volume growth, as measured in RTMs.

CP Rail stock last had a favourable P/E ratio of 24. It last paid out a quarterly dividend of $0.19 per share. This represents a meagre 0.8% yield.

Which stock is the better buy?

Canadian National Railway stock and CP Rail have both proven resilient over the past year. These transportation giants are in a great position to benefit from a North American economy on the rebound. Predictably, the debate between the two is a close call. However, I’m sticking with Canadian National Railway over CP Rail in early May.

The former is close in terms of its value and it offers a superior dividend yield. Moreover, Canadian National Railway put together a better first quarter and is projecting strong growth going forward. I’m looking to stash this stock going forward.