Canadian National Railway (TSX: CNR) and Canadian Pacific Kansas City (TSX: CP) are peers in the railroad industry in the industrial sector, which suggests that their stocks are likely to move more or less in tandem. Investors can see this trait by playing with the chart below. Specifically, by selecting the “1Y” and “5Y” buttons, you can observe that when one stock declines or rises, the other also tends to move in the same direction.
Let’s compare and contrast the two industrial stocks to see which may be a better buy.
Stock performance
Though the past doesn’t necessarily predict the future, historical stock performance may be an indicator of the future. In the last three, five, and 10 years, Canadian Pacific Railway stock has outperformed Canadian National Railway stock. Specifically, it returned about 47% versus 26%, 117% versus 49%, and 334% versus 249%, respectively, in those periods.
In other words, both stocks have increased shareholders’ wealth in the long run. If you invested $10,000 each in both stocks about 10 years ago, you would now have about $43,400 for CP Rail and $34,880 for CN Rail. In another perspective, the rate of return for CP and CN was 15.8% and 13.3%, respectively, over the last decade.
CP had the advantage of being a smaller player and grew faster with adjusted earnings per share (EPS) growth at a compound annual growth rate of roughly 15.8% in the past 10 years, whereas CN’s adjusted EPS growth rate was 10.3%.
CP Rail’s size and reach just ascended to the next level by merging with Kansas City Southern, which expanded its footprint into Mexico. This merger combined the two smallest Class 1 railways in North America.
Dividend
Canadian National Railway stock has a better dividend growth track record. It has increased its dividend for about 27 consecutive years. Its three-, five-, and 10-year dividend-growth rates are 10.9%, 12.2%, and 14.6%, respectively. Its current dividend yield is approximately 2%.
Its payout ratio is estimated to be about 42% of adjusted earnings this year. Notably, this is at the high range of its historical range, and its last dividend hike was 7.8% in January. So, future dividend growth could be at or below its earnings growth, depending on whether management prefers a lower payout ratio.
Canadian Pacific Railway stock’s dividend-growth history was more unpredictable. At times, it freezes its dividend, even when its payout ratio is low, the business is healthy, and its financial position is solid. For example, it froze its dividend in 2014, 2015, and 2022. For your reference, its 10-year dividend-growth rate is 10.9%. Its payout ratio is estimated to be about 19% of adjusted earnings this year. Its dividend yield is about 0.7%.
Valuation, growth, and total returns potential
At $156.71 per share at writing, analysts believe Canadian National Railway is fairly valued and is expected to grow EPS by about 8.2% per year over the next three to five years. Assuming its valuation stays the same, it can deliver total returns of around 10% per year over this period.
At $107.63 per share at writing, analysts also believe Canadian Pacific Railway is fairly valued and is expected to grow EPS by about 13.4% per year over the next three to five years. Assuming the valuation stays the same, it can deliver total returns of around 13% per year over this period.
Which is a better buy today? If you care more about total returns, CP Rail is likely a better buy. CN Rail is a better dividend stock for more consistent dividend growth. If that’s what you want, consider CN Rail.
