Better Buy: Canadian Pacific Railway Stock or Canadian National Railway?

Both CNR and CP are excellent long-term buy-and-hold stocks. Here’s how I would invest in them.

| More on:
rail train

Image source: Getty Images

While I usually find myself at odds with Canada’s bank and telecom oligopolies — thanks to their poor customer service, lack of choice, and noncompetitive fees — I must admit that I have a soft spot for Canadian National Railway (TSX:CNR) and Canadian Pacific Railway (TSX:CP) duopoly.

Maybe it’s because their operations don’t directly affect me as a consumer in the way that banks and telecoms do. Regardless, what really piques my interest is how well this duopoly can work for me as an investor.

Beyond the appealing financial metrics these companies often exhibit, the duopoly situation grants CNR and CP a rare trait that most companies can only dream of — a wide economic moat.

Let’s break down what that economic moat actually means, how it serves as a protective barrier against competition, and why it makes both of these railway stocks compelling investment options.

What the heck is a wide moat?

Warren Buffett, the Oracle of Omaha himself, has frequently emphasized the importance of an “economic moat” when selecting investments.

He has been quoted as saying, “In business, I look for economic castles protected by unbreachable moats.” But what exactly does this metaphor mean in the context of investing?

In simple terms, an economic moat refers to a company’s sustainable competitive advantage that protects it from competition, much like how a medieval castle’s moat protects it from invading armies.

This moat could be in the form of brand recognition, cost advantages, regulatory advantages, or, as in the case of CNR and CP, control over an industry with high barriers to entry.

For example, consider a small lemonade stand with a secret recipe that makes it incredibly popular. If it’s the only stand that knows how to make this special lemonade, it has a “wide moat” because other lemonade stands can’t easily replicate its success and thus steal its customers and market share.

Similarly, CNR and CP operate in an environment where it would be exceedingly difficult and costly for a new competitor to build a rail network and gain the necessary regulatory approvals.

In short, this wide moat acts as a protective barrier, helping the company maintain its market share and pricing power, which ultimately benefits investors.

The effects of a wide moat

For long-term investors, a company with a wide moat offers several key benefits that contribute to more stable and potentially higher returns.

One of the most immediate advantages is pricing power. A strong competitive edge allows these companies to set prices without losing customers to competitors, often leading to higher profit margins.

Case in point: CP currently has an incredibly high operating margin of 41.51%, while CNR sits at 46.59%. Both companies possess a return on equity (ROE) of 11.22% and 24.97%, respectively, signifying that both companies are efficiently using their shareholders’ equity to generate profits.

Finally, take a look at the backtest below, which shows CP and CNR outperforming the benchmark S&P/TSX 60 Index from 2002 to the present.

Normally, I don’t feel comfortable picking individual stocks, but I make an exception for wide-moat companies like CP and CNR. In this case, I would simply split the difference and buy both sides of the duopoly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Canadian National Railway and Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

More on Investing

money cash dividends
Dividend Stocks

2 Stocks Under $100 You Can Buy and Hold Forever

While many stocks continue to trade cheaply, here are two of the best in Canada to buy today and hold…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: 2 High-Yield Dividend Stocks to Buy for Passive Income

Given their solid underlying businesses and high dividend yields, these two dividend stocks are an excellent buy for retirees.

Read more »

Early retirement handwritten in a note
Dividend Stocks

2 TSX Dividend Stocks to Buy Today to Help You Retire Early

Buying these two reliable TSX dividend stocks today can help you retire early if you hold them for the long…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Dividend Stocks

Is Northwest Healthcare Stock Oversold?

Northwest Healthcare stock has plummeted 41% so far this year on concerns over its financial health as interest rates shot…

Read more »

TFSA and coins
Dividend Stocks

How to Earn $1,800 Per Year in a Self-Directed TFSA

This TFSA investing strategy can reduce risk and still generate attractive tax-free passive income.

Read more »

A airplane sits on a runway.
Stocks for Beginners

Where Will Air Canada Stock Be in 5 Years?

Can Air Canada stock yield handsome returns on your investments in the next five years? Let’s find out.

Read more »

Business people standing near houses models

Up 93.6% This Year, Is SNC-Lavalin Stock Still a Buy?

SNC-Lavalin's stock price has soared in 2023. Could it have more room to grow past historical growth stretches?

Read more »

A stock price graph showing growth over time

Couche-Tard’s Next Big Acquisition Could Send Shares Surging

Alimentation Couche-Tard (TSX:ATD) stock is crushing the markets, and could continue to do so in the next decade.

Read more »