Canadian National Railway (TSX:CNR) and the recently renamed Canadian Pacific Kansas City Railway (TSX:CP) have been excellent investments over years and decades. These two companies compete in a duopoly across Canada, which means they have very strong competitive moats and persistently strong pricing power.
Canadian rails have been exceptional long-term stocks
Over the past 20 years, CNR stock has earned a 1,431% total return, or 14.56% averaged annually. In that time, CPKC stock has earned a 1,617% total return, or 15.22% averaged annually.
While both have been exceptional stocks, there are reasons and merits to own one versus the other. If you are wondering which is better today, here are some crucial points to consider.
CN stock is the best bet for dividends
With a market cap of $102 billion, CN Rail is the larger of the two stocks. It operates a 20,000-mile network that spans from the Pacific to the Atlantic in Canada, across the American Midwest, and down to the Gulf of Mexico.
Despite its high-quality network, CNR stock has underperformed CPKC stock by 60 percentage points over the past five years. Its operating ratio (a measurement of operating expenses divided by net sales) had crept close to 65%, which indicates efficiency is declining.
Fortunately, CNR installed a new chief executive officer who has focused on maximizing velocity and efficiency across its network. Its operating ratio has improved to the 60% range. Over the past five years, it has grown earnings per share (EPS) by an 8.4% compounded annual growth rate (CAGR) and profit margins have recovered from 27% to close to 30%.
CNR stock has a market-leading balance sheet with only 1.9 times debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The company generates a lot of excess cash.
It has been that towards annually growing its dividend (around 2% yield today) and buying back stock (around 2-3% per year). For a growing yield, a fortress business, and reasonable valuation (around its average), CN is a solid stock to consider here.
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CPKS stock is the best bet for capital compounding
With a market cap of $98 billion today, CPKC Rail has substantially gained size and scale after it recently completed its acquisition of Kansas City Southern Railway. The deal has made CPKC a rival of equals to CNR stock.
Today, it also has around 20,000 miles of track. CPKC is now the only singular North American rail that connects across Canada, the United States, and Mexico. It is still early days, but beyond the $1 billion of synergies it expects, CPKC also expects significant opportunity to grow sales.
Historically, CPKC has been known for an industry leading profitability and a low operating ratio due to its use of precision scheduled railroading. While it has risen since the merger, one can expect it to eventually hit its historical 50-60% range. Over the past five years, CPKC has grown EPS by a 10.8% CAGR. It has a profit margin of 29%.
The biggest risk is that CPKC has taken on a lot of debt to acquire Kansas City. Fortunately, it financed most of the debt at historically low rates. It sits with a net debt-to-adjusted EBITDA ratio of 3.5 times, which is quite a bit higher than CN. It only pays a 0.72% dividend yield, and it has not raised its dividend in three years.
The Foolish takeaway
When comparing the two, my bet goes to CP. While it lacks in dividend yield, it has a substantial opportunity to grow at nearly double the pace of its peers. Given its larger balance sheet, CPKC stock is riskier than CNR, but the longer-term reward also seems substantially higher.
If you like steady dividend-growth and share buybacks, CNR is your stock. However, if you want capital growth and the ability to compound returns, CPKC is likely the better buy today.