Canadian National Railway (TSX:CNR) looked like it was on track to become the best in the business of railway. That was just a few years ago, with the company absolutely exploding with cash and wanting to use it to purchase up Kansas City Southern Railway.
The problem was, CNR stock, unfortunately, already had many rail lines that crossed the same ones as KCS. So, while the company had the cash, it still lost the bidding. Yet this could mean the company is now on track to become a dividend titan. But is that enough?
Today, we’ll dig into CNR stock to see if the railway titan is on track for more growth. Or if losing KCS could be a sign of more losses to come.
Greatness from greatness
CNR stock was the top dog for decades as the company was long the highest-margin Class I railroad in the early 2000s. The company made great use of its locomotives and extended its destinations throughout the years. Yet since that time, the company is now focusing more on growth, especially since 2019.
The company has managed to continue its solid cash flow, despite facing strikes, blockages, poor weather conditions and so on. This isn’t likely to change, as the demand for supply chains and fast delivery remains top of mind for consumers and businesses.
Free cash flow has remained in the high teens, as a percentage of sales for over a decade for CNR stock. This comes from a solid mix of intermodal, agriculture and chemicals, with contributions from forest and automobiles as well. And while it can’t boast the only railway running through North America, it can boast its three-coast system spanning Canada and running down to New Orleans.
But can it keep going?
In the next year, new chief operating officer Ed Harris is likely to start its focus on precision railroading once again. This will be helped along by continued exclusive access to Prince Rupert for long-term growth opportunities as well as trucking—something its peers simply don’t have.
However, growth is now far less than it was. Add in wage inflation and normalizing yields, and it could make its operating ratio more challenging this year alone. Cost advantages will be what drives CNR stock in the near future, at least. Railroads are far more cost-advantageous to companies, plus they can carry far more than most other transportation methods.
Furthermore, there is practically no way that another railway would suddenly edge in on CNR stock and its peers’ territory. Infrastructure costs would preclude any profit and destroy value, leaving CNR stock and its network as a huge benefit to companies in Canada.
A medium-risk investment
Overall, CNR stock is a medium-based risk investment. The company certainly doesn’t seem to have any competition coming its way in the future. It remains a healthy company that should continue to have the power to fuel its dividend, along with stable cash flows.
As the company looks to create more precision railroading in the next year, hopefully, more growth opportunities will come its way in the years to follow. Yet, for now, freight demand has the risk of a downside with continued supply-chain delays. This could hurt the company as winter weather hits.
So, if you’re into CNR stock, don’t buy it with the plan to create huge returns in the year or so to come. It’s a long-haul purchase, and there are benefits to that as well. The stock trades at a reasonable 18.68 times earnings and a dividend yield of 2.15%. And with shares down 4% in the last year, you could still see a reasonable return in the near future.
