Royal Bank of Canada (TSX: RY) is one of Canada’s most popular dividend stocks. The largest Canadian stock by market cap, it has a vast base of shareholders across the country and abroad. Indeed, Royal Bank is a well-run company by any standard. It’s profitable, it’s growing, and it even has a major merger and acquisition (M&A) deal in the works that could add up to a billion dollars a year in extra earnings.
So, there are many reasons to like Royal Bank of Canada stock. With that said, there is one Canadian dividend stock I like even better. A stock widely owned by some of the world’s smartest and most informed investors, it has enriched shareholders consistently over a period of many decades. In this article, I will explore this most distinguished of Canadian companies and why I like its stock more than RY.
CN Railway
Canadian National Railway (TSX: CNR) is a Canadian railway stock. I owned this stock for several years; I finally sold my holdings in it last year to finance an investment in Berkshire Hathaway. That trade worked out well for me, as BRK.B has performed better than CNR since my sale. Nevertheless, I still maintain that CNR is a great stock in an absolute sense.
What makes CN Railway so great?
First, it has a strong competitive position. It has only one competitor in Canada, and only a small handful of them in the United States. This lack of competitors gives CNR a lot of pricing power.
Second, CNR is an economically indispensable company. It ships $250 billion worth of goods across North America every year. Its rail network touches on three coasts, which gives it the ability to do routes that no other North American railroad can.
Third and finally, the stock is relatively inexpensive. It currently trades at 19.8 times earnings, which is not dirt cheap, but is cheaper than the valuation observed in much of the last two years. Also, the company is growing earnings at 39% (most recent quarter) or 17% (trailing 12-month period), so, arguably, a moderately steep valuation is justified.
Recent earnings
CN Railway’s most recent earnings release was a big hit, exceeding analyst estimates on revenue as well as earnings per share (EPS). Some key metrics from the release included the following:
- $4.31 billion in revenue, up 16%
- $1.2 billion in net income, up 33%
- $1.93 billion in operating income, up 28%
- $1.82 in EPS, up 39%
Overall, it was a very strong earnings release. Every single metric of concern to investors improved compared to the prior year’s quarter, and the profit margin was 28%. So, the second quarter was a win for CN Railway.
Foolish takeaway
Royal Bank of Canada is a very good company. It has high margins, it’s growing moderately, and it has a big M&A deal in the works. On the whole, it should reward investors over the long term. But for my money, CN Railway is the better stock. It’s growing faster and has far fewer competitors. It should continue rewarding investors in the future like it did in the past.
