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Railway systems are the backbone of the economy. After all, many goods and raw materials are transported by railway companies. In particular, Canadian National Railway (TSX:CNR) carries more than 300 million tonnes of cargo every year!
CN Rail is one of two class I railroads that is a dominant freight rail operator in Canada. It hauls coal, metals and minerals, petroleum and chemicals, grain, and forest products, temperature-controlled cargo, consumer goods, and automotive. Its network spans Canada and Mid-America, connecting three coasts: the Atlantic, the Pacific, and the Gulf of Mexico.
Last year, CN Rail’s total revenue was $17.1 billion, driving operating income of almost $7.4 billion. This revenue was almost 15% higher than in the base year of 2019 — let’s call this the pre-pandemic level. Also, its operating margin improved about 2.4% to 43.2% versus in 2019. Net income was $5.1 billion, an increase of 21% from 2019.
CN Rail is a well-run company. And it is a blue-chip industrial stock. Therefore, the railway stock typically trades at a premium valuation. Despite relatively high inflation recently and rising interest rates as a result, the stock has been quite resilient, trading in a sideways range. In the last 12 months, the stock has only declined approximately 1%, which is a tiny drop for stocks.
For your reference, here is CN Rail’s actual performance. In the past 10 years, it increased its adjusted earnings per share at a compound annual growth rate of close to 10.3%. In the last 10 years, the stock returned about 12.4% per year, which aligns with its earnings growth combined with dividends received. This return outperformed the Canadian stock market’s return of 7.9% per year in the period. Today, CN Rail stock offers a dividend yield of just over 2.1%.
The company’s five-year return on assets, return on invested capital, and return on equity are about 10.1%, 15%, and 23.5%, respectively. These are solid returns that extensively outperformed the index. For instance, its five-year return on equity is almost double that of the index. Moreover, these performance metrics were higher over the last 12 months for CNR.
At $147.50 per share at writing, CN Rail stock is neither cheap nor expensive in the current environment. This is a price-to-earnings ratio of about 20.2 for a potential long-term earnings-per-share growth rate of 10-12%. The problem right now is that relatively high inflation and interest rates will likely be a dampener on growth in the near term. In fact, its earnings could dip about 3% this year. To be clear, this would be very resilient results in an economy that has heightened risk. However, investors like growth. So, in the near term, the stock is likely to go nowhere or even be pressured.
At the recent quotation, analysts believe the stock trades at a discount of about 11%. To be conservative, let’s say the stock experiences no valuation expansion and grows its earnings by 10% per year. Including its dividend yield of 2.1%, investors can expect to receive total returns of more or less 12% in the stock over the next five years.
CN Rail also has the DNA to increase dividends. It has raised its dividend for about 27 consecutive years with a 15-year dividend-growth rate of 13.8%. Since it maintains a sustainable payout ratio and its earnings are expected to grow, investors can anticipate more dividend increases in the years ahead.
