Railroad stocks were extremely crucial in supporting the economic expansion in the Americas in the last century. These companies still remain an important part of the economy, as they transport a number of goods across the continent while connecting major ports.
Amid the COVID-19 pandemic, supply chains were disrupted, resulting in a delay in shipments via the sea and road. However, railroad companies performed well due to their ability to move shipments 24/7 with just a handful of employees.
The focus on cost optimization in recent months suggests enterprises now want to save on fuel due to elevated inflation and higher oil prices, making railroads the best transportation solution.
Due to their vast size and robust balance sheets, railroad companies are also better poised to withstand an economic downturn allowing Canadian railroad stocks to deliver outsized returns to shareholders.
For instance, in the last 20 years, shares of Canadian National Railway (TSX:CNR) and Canadian Pacific Kansas City (TSX:CP) have returned 2,160% and 1,900%, respectively, after adjusting for dividends.
Let’s see if you should buy these two top TSX stocks right now.
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Canadian National Railway stock
One of the largest companies on the TSX, Canadian National Railway, is valued at a market cap of $107 billion. It transports 300 million tons of natural resources, manufactured products, and finished goods across North America annually.
Canadian National Railway connects Canada’s eastern and western coasts with the U.S. south in a rail network that spans 18,600 miles.
Despite a challenging environment in 2022, CNR increased sales by 18% year over year to $17.1 billion. Comparatively, adjusted earnings grew by 25% to $7.46 per share, allowing it to report a free cash flow of $4.3 billion.
The company explains that running a scheduled railroad allows it to unlock additional capacity and identify the required corridors to enhance capacity. Additionally, it also focuses on increasing long-term shareholder value via buybacks and dividend payouts once it has invested in organic growth opportunities.
Since May 2003, CNR stock has increased dividends by 16% annually, which is quite exceptional. It currently pays shareholders an annual dividend of $3.16 per share, indicating a yield of 2%.
Canadian Pacific Kansas City stock
Another TSX giant, Canadian Pacific Kansas City, is valued at a market cap of $104 billion. Despite its massive size, the company increased revenue by 23% year over year to $2.26 billion in the first quarter of 2023. As operating expenses rose just 10%, it reported an operating income of $829 million — an increase of 55% year over year.
Compared to CNR, CP offers investors a dividend yield of less than 1%. However, in the last 12 months, it distributed less than 30% of its free cash flow via dividends, providing CP with enough room to increase these payments. In the last 10 years, CP has increased dividends by almost 11% annually.
CP continues to reinvest in growth, which, in turn, drives future cash flows higher. In the last three years, it has allocated 45% of operating cash flows towards capital expenditures. It also completed a $31 billion acquisition with Kansas City Southern last month, expanding its operations to Mexico.
Due to the big-ticket acquisition, analysts expect CP to increase sales by 33.5% to $11.77 billion in 2023.
