Better Buy for Total Returns: CNR Stock or CNQ Stock?

Canadian National Railway and Canadian Natural Resources delivered solid returns in 2022. Are more gains on the way?

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Canadian National Railway (TSX:CNR) and Canadian Natural Resources (TSX:CNQ) are leaders in their respective industries and have good track records of delivering dividend growth and capital gains to investors over the long haul.

The stocks fared well during the market correction last year, and investors are wondering if one is good to buy right now for a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on total returns.

Canadian National Railway

CN operates a unique network of rail lines that crosses Canada from the Pacific to the Atlantic and runs down through the heart of the United States to the Gulf Coast. The company serves a strategically important role in the smooth operation of the North American economy, moving essential goods and commodities from producers and suppliers to their customers.

CN demonstrated in 2022 that it has the power to raise prices when its costs increase. This is important for investors to consider in the current era of high inflation. Adjusted net income in 2022 rose to $5.13 billion from $4.23 billion in 2021. This helped the stock price finish the year in positive territory.

CN just raised the dividend by 8% for 2023, marking the 27th straight year of distribution increases. The company plans to repurchase up to 32 million common shares over the next 12 months as part of the new share-buyback program. This represents about 4.8% of the outstanding stock.

Canadian Natural Resources

CNRL is Canada’s largest energy producer with a current market capitalization of $83 billion. The company is widely known for its oil sands operations, but CNRL has a diversified portfolio of energy production that also includes conventional heavy and light oil, offshore oil, natural gas liquids, and natural gas.

Management used the cash windfall from soaring energy prices in the past two years to reduce debt, buy back stock, and raise the dividend. CNRL also paid out a special bonus dividend of $1.50 per share to investors last summer. The board has increased the payout annually for 22 years and has delivered a compound annual dividend growth rate of better than 20% over that timeframe. This is rare for energy producers who are at the mercy of commodity prices to determine their revenue and cash flow.

CNRL has a strong balance sheet that helps it navigate downswings in oil and gas prices. The company is also able to move capital around the portfolio quickly to take advantage of positive moves in energy prices. CNRL tends to own its assets 100%, so it has more capital flexibility than peers who might have multiple partners on projects.

At the time of writing, the stock trades near $75 compared to $88 last June. Investors can now get a 4.5% dividend yield. The fourth-quarter 2022 results will come out on March 2, 2023.

Is one a better pick today?

CN is probably the safer choice for buy-and hold investors who don’t want to worry about fluctuations in oil and gas prices. Investors seeking a higher dividend yield and a shot at more upside in the event energy prices take off again later this year might consider adding CNRL to their portfolios as their first choice. I would probably split a new TFSA or RRSP investment between the two stocks today.

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 and Canadian Natural Resources. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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