Canadian blue-chip stocks have created massive wealth for shareholders in the last 20 years. In this period, these large-cap giants have wrestled with the dot-com bubble, a global financial crisis, the COVID-19 pandemic, inflation, and recent interest rate hikes.
But generally, blue-chip companies enjoy wide economic moats and stable gross margins, allowing them to maintain cash flows and earnings across market cycles. One such top TSX stock is Canadian National Railway (TSX:CNR), a company trading at an enterprise value of $117.6 billion.
In the last 20 years, CNR stock has returned 1,140% to shareholders. After adjusting for dividends, total returns are higher at 1,640%. So, a $1,000 investment in CNR stock in September 2003 would be worth $17,360 today. Comparatively, a similar investment in the TSX index would be worth less than $5,000 in this period.
While Canadian National Railway has crushed broader market returns, let’s see if it remains a compelling bet at the current valuation.
The bull case for Canadian National Railway stock
Railroad stocks such as Canadian National Railway were primarily responsible for the investment boom experienced in North America in the last century. Over 100 years later, they remain a critical part of the economy.
While transportation stocks are generally cyclical, railroad companies perform better amid economic downturns as they are better capitalized than trucking and aviation companies. For instance, when oil prices rise, truckers and airlines see a steep decline in profit margins. But as railroad companies can transport a significant amount of cargo, the bottom-line dip is negligible.
Canadian National Railway operates over 20,000 miles of track spanning three coasts. With more than 40 distribution centres in North America and 23 intermodal terminals, the company transports goods across 13,000 origin and destination ports.
CN is a trade enabler and is essential to the economy. It transports over 300 million tons of natural resources, manufactured products, and finished goods across North America each year. It aims to create value for customers and shareholders by leveraging the strength of its network and focusing on operational efficiencies.
With $50.7 billion in total assets, CNR reported revenue of $17.1 billion in 2022. It deployed $2.75 billion in capital expenditures, which should drive future cash flows higher. The company also reported a free cash flow of $4.3 billion, allowing it to pay shareholders an annual dividend of $3.16 per share, indicating a dividend yield of 2%.
What’s next for CNR stock price and investors?
In the last five years, CNR has increased sales by 5% annually while adjusted earnings and free cash flow grew by 8% and 14%, respectively. This allowed CNR to increase dividends by 13.6% annually in the last nine years.
Despite its massive size, analysts expect CNR to increase sales to $17.75 billion in 2024. Moreover, its adjusted earnings are forecast to expand from $7.46 per share in 2022 to $8.3 per share in 2024.
Priced at 18.5 times forward earnings, CNR stock is reasonably priced and trades at a discount of 7% to consensus price target estimates.
Canadian National Railway can provide your portfolio with diversification and help you earn a steady stream of dividend income for years.