The power of compounding is quite often underestimated by equity investors. Despite the fluctuations surrounding the stock market, investors should remain invested over time to benefit from compounded gains. Let’s see why.
One of the largest TSX stocks, Canadian National Railway (TSX:CNR) has outpaced the broader markets by a significant margin over the past two decades. Since July 2003, CNR stock has returned 1,380% to shareholders. After adjusting for dividends, total returns are closer to 2,000%.
So, an investment of $10,000 in CNR stock in 2003 would be worth $206,000 today. Comparatively, a similar investment in the TSX index would have turned $10,000 into $51,670.
Is CNR stock still a good buy?
Canadian National Railway is a leading transportation and logistics company in North America. Its transports over $250 billion worth of goods each year that range from resource products to manufactured goods. Its rail network spans 23,000 route miles across Canada and mid-America.
A TSX giant, Canadian National Railway, is valued at a market cap of $106 billion and an enterprise value of $123 billion. It is a transportation leader and trade enabler and is extremely crucial to the Canadian economy, transporting 300 million tons of goods each year.
Despite an inflationary environment, CNR reported diluted earnings per share of $1.82 in the first quarter (Q1) of 2023, an increase of 38% year over year due to disciplined and scheduled operations. Its operating ratio improved by 510 basis points to 61.5% in Q1, and the company now expects to deliver mid-single-digit adjusted earnings growth in 2023.
Canadian National Railway explained strong bulk shipments such as grain and coal were offset by weakness in consumer-driven products, including chemicals and plastics, in Q1. Additionally, pricing on contract renewals remained above rail inflation levels showcasing its pricing power.
Armed with 5.7 million carloads and $50.7 billion in total assets, CNR has increased sales from $14.9 billion in 2019 to $17.1 billion in 2022. Its free cash flow stood at $4.3 billion last year, indicating a margin of 25%.
A look at CNR stock price and valuation
Canadian National Railway allocated $2.75 billion toward capital expenditures in 2022, which should drive future cash flows and earnings higher. An expansion in profit margins will also help the TSX heavyweight increase dividend payouts consistently. In the last 20 years, its dividends have increased by 17.5% annually.
CNR currently pays shareholders an annual dividend of $3.16 per share, indicating a forward yield of 2%. CNR stock is priced at 20.6 times forward earnings and is forecast to increase net income by 9% annually in the next five years, which should support further dividend raises.
Canadian National Railway benefits from a wide economic moat and a three-coast network built through strategic acquisitions. With 23 intermodal terminals, CNR has access to seven major ports in North America.
The company now aims to leverage technology to drive improvements in operational efficiency and fuel efficiency. Further, a strong balance sheet provides CNR with financial flexibility, fleet additions, and capacity infrastructure investments, which in turn will support long-term growth.
Analysts remain bullish on CNR stock and expect shares to surge over 5% in dividend-adjusted gains in the next 12 months.
