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Canadian National Railway: Should You Buy the Stock Now?

Freight Train
Image source: Getty Images

CN (TSX:CNR)(NYSE:CNI) spent a lot of time in the business news headlines in recent months as a result of its bid to buy U.S.-based Kansas City Southern for US$30 billion. The offer trumped an initial US$25 billion agreement CP Rail had in place to buy the U.S. railway.

Kansas City Southern deal on the ropes?

In the latest turn of events, CN’s effort to win regulatory approval for the deal became more difficult after the U.S. Surface Transportation Board (STB) decided not to allow a voting trust to be used in the takeover process. The voting trust provision would have enabled KCS shareholders to get paid while the deal went through the rest of the regulatory hearings. A lack of the voting trust puts shareholders at a higher risk in the event the deal gets blocked. The decision has led Kansas City Southern’s board to reconsider an improved US$27 billion offer from CP that already has the voting trust approved.

Part of CN’s routes overlap the KCS lines, whereas CP would simply connect two exclusive networks. The attraction of KCS is the extension into Mexico where KCS gets about half of its revenue. A single network that runs from Mexico to Canada would be appealing for domestic and international businesses looking to move cargo in the most efficient manner.

CN is under pressure from at least one major shareholder to walk away. The market seems to think the deal is dead and sent CN’s share price soaring from $138 before the STB announcement to $159 per share at the time of writing. The stock had previously pulled back from $148 to below $130 when CN first announced its intention to buy KCS earlier this year.

CN stock outlook

The recent bounce in the stock price shows that investors see strong growth potential for CN in its current operational form. CN already has a unique network that connects ports on the Atlantic and Pacific coasts in Canada to the Gulf coast in the United States.

The stock has delivered strong returns for buy-and-hold shareholders over the past two decades and that trend should continue, regardless of how the saga plays out over the coming days or months. CN is very profitable and has a great track record of dividend growth. In the event CN decides to abandon the Kansas City Southern bid the company will likely increase the dividend in 2022 by more than it would if the deal were to go through. CN would need to take on a large chunk of debt to get the takeover completed, and distribution hikes might not be as robust in that scenario.

Should you buy CN stock now?

The stock looked oversold at $130 and still appears cheap for a buy-and-hold TFSA or RRSP portfolio.

That being said, investors might want to take a half position today. CN could still decide to appeal the STB decision, boost its offer price and continue to pursue the Kansas City Southern takeover. This is a near-term risk for the stock, as it would likely lead to another plunge in CN’s share price. If that happens, investors should use any correction as an opportunity to add to their CN holdings.

Over the long haul, this is a stock that deserves to be in your portfolio.

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.

The Motley Fool recommends Canadian National Railway. Fool contributor Andrew Walker owns shares of Canadian National Railway.

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