The railway stocks have been trading lower in recent weeks, as macro headwinds continue to weigh. Higher rates are also not doing them any favours, as the market continues to drag, with recession risks that could rise from here.
In the short term, the railway stocks could continue to stumble, but in the longer term, I think they’ll continue on their market-beating ways.
Although nobody knows when rails will start chugging higher again, I wouldn’t pass up on the latest dips if you’re in the market for a supreme dividend-growth stock to hang onto for years (or even decades) at a time. Their wide moats make their long-term growth profiles that much more attractive.
So, without further ado, let’s check out the two top rail plays to see which one looks like the better value at this juncture.
CN Rail
CN Rail (TSX:CNR) is deep in correction territory, with the stock falling another 1.1% on Monday’s session, bringing it down nearly 15% from its all-time highs. History suggests that anytime CN Rail stock sheds 15% of its value, buying the dip has proven wise, at least over the long term.
Over the past year, the stock has been an ugly ride, but the long-term fundamentals haven’t really changed much. Of course, a looming recession and ongoing industry-specific challenges have taken the momentum right out of shares.
As the recession comes and goes, CN Rail will be ready to recover, and volumes are bound to uptick as economic growth comes back online. Until then, it’s going to be a bumpy ride. But at the very least, investors can look forward to nice dividend payments. At writing, shares yield 2.15%. That’s on the high end!
As for the valuation, shares trade at 18.65 times trailing price to earnings (P/E). That’s really cheap for such a long-term market beater. Under its new chief executive officer, CN Rail stock has underwhelmed, falling 5% in just under two years’ time—quite the underwhelming period of performance for the long-time rail kingpin. If CN Rail can’t handsomely surpass estimates over the coming year, count me as unsurprised if there are calls for another top boss.
CP Rail
CP Rail (TSX:CP) stock has been so incredibly resilient compared to many of its peers that it is now deep in a correction. More recently, shares slipped into its own correction, with shares now off 11% from their highs. Most of the latest plunge (around 7.6%) came over the past month.
Indeed, CP Rail is succumbing to the pressures of its rivals. And unfortunately, I think CP stock could have more room for downside versus its more-battered peers. At this juncture, CP has a more promising long-term growth trajectory following its acquisition of Kansas City Southern.
That said, a 21.7 times trailing P/E multiple still seems way too high, given the industry headwinds that may take a turn for the worst going into 2024. I think 20 times P/E is a fairer price to pay for the railway as it continues rolling over.
The better buy for fall 2023?
Though CP looks that much more attractive relative to CN after its latest September slump, I still view CN as a better value bet. Why? It’s the cheaper stock, with the higher dividend yield, and more punishment in the rearview. Only time will tell when rail stocks will bottom out. Regardless, dip-buyers should be enthused by recent downward moves.
