Canadian National Railway (TSX:CNR) is one of Canada’s best-performing dividend-growth stocks. Over the last 10 years, the company’s dividend has more than doubled, growing at a compound annual growth rate (CAGR) of 14%. If you’d invested in the stock back in 2013, you’d have a very high yield-on-cost today.
Of course, past results don’t predict future results: CNR’s dividend growth may lag behind its historical growth. In fact, with the company’s dividend growth having been so high in the past, it likely will slow down in the future. Nevertheless, the stock’s dividend will probably grow somewhat and pay current shareholders well into the future.
In this article, I will explain why I believe that to be the case.
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Large economic moat
One reason why CN Railway stock could see dividend appreciation in the years ahead is due to the company’s wide economic moat. An “economic moat” is a set of durable competitive advantages that keep competitors at bay. CN Railway has several of these:
- A vast collection of established infrastructure.
- A rail network that touches three coasts.
- Only one existing competitor in Canada and a small handful in the United States.
- A fleet of trucks that helps the company capture more revenue from its clients’ supply chains.
Speaking of trucks: rail, in general, has a massive advantage over trucks for long-distance shipping, because rail is more cost efficient than trucks. The downside is that trains can only go where their tracks go, so trucks are necessary for less easily accessed areas. It’s for this reason that CNR has a truck fleet of its own: it allows the company to capture more revenue.
High profit margins
Another reason why CN Railway could experience dividend growth in the years ahead is because the company is highly profitable. In the last 12 months, CNR enjoyed a 56% gross margin (gross profit divided by revenue) and a 30% net margin (net income divided by revenue). Both of these figures are well above average, suggesting that CN Railway has a lot of profit that it can use to grow its business.
Solid growth
Last but not least, there’s the fact that CN Railway is a growing company. Over the last 10 years, the company’s revenue has grown by 5.5% CAGR, and its earnings have grown by a10.2% CAGR. If CN Railway can keep its historical growth going into the future, then the company will have plenty of room to raise its dividend. Also, the company’s payout ratio (dividend divided by earnings) is only 39%, so there is some room to raise the payout, even if profits don’t grow.
Foolish takeaway
CN Railway stock has rewarded its shareholders handsomely over the years. Between strong capital appreciation and high dividend growth, the company has delivered value to its shareholders in many ways. Of course, the company’s past growth does not mean it will grow in the future, but there are other reasons to think that it will. For example, the fact that it has few competitors. These kinds of things lend themselves well to good performance, and CNR has them in spades.
