Canadians really don’t have that much choice when it comes to investing in the railway. And honestly, I’d say that’s a good thing. The duopoly in the market between Canadian National Railway (TSX: CNR) and Canadian Pacific Kansas City (TSX: CP) means both are strong with strong futures.
That being said, which is the better buy today? Let’s look at both on the TSX today, and see what’s ahead.
CNR stock
CNR stock has a history of being the highest margin, with the lowest operating ratio Class I railroad. Its precision railroading made great use of its locomotives, and it has expanded from coast to coast to coast. Yet over the last few years, there has been a bit of trouble.
CNR stock became very focused on growth between 2019 and 2021, which hit a head when it attempted to buy Kansas City Southern. Leadership changes, congestion, and strikes all hurt the company, even as railroads produce solid cash flows. Yet now, growth looks to be perhaps in the rearview for now; the company is focusing on its precision railroading once more.
Furthermore, CNR stock continues to be the only railway with access to the port of Prince Rupert. This should continue to bring in long-term growth for the company. So, while there has been a rough year for CNR stock, it looks like improved growth, lower inflation, and a normal market should create a better operating ratio for the company.
CP stock
CP stock was behind CNR stock in several ways before 2009, when it snatched up CNR stock’s chief executive officer Hunter Harrison. Since then, the company has had an incredible path to profitability. This focus has been ingrained into CP stock now, surpassing CNR stock in terms of its operating ratio in 2019 at 60%.
And while CNR stock lost out on the Kansas City deal, CP stock managed to gain approval from the Surface Transportation Board (STB). The two merged this year, creating a new single-line railway connecting Canada through the United States and into Mexico. This should create massive synergies in the year to come, along with new revenue streams.
Yet what comes with mergers is debt, and CP stock had to cut its dividend for this sale. Operating ratio improvements are going to remain challenging this year and next, as organic growth remained low and wage inflation rose. Even so, there should be more improvements in 2024, though if it’s going to be as much as CNR stock, we can only guess.
Bottom line
Right now, CNR stock looks like the better buy if you’re looking for an investment for the next year or so. The company continues to focus on its precision railroading roots, and that should see meaningful gains in the next year. However, long-term investors could, in fact, do well with CP stock. The company may be down for now, but in an improved marketplace, it should see improved metrics.
So, the choice is yours, but today, CNR stock looks like the better buy. And with shares offering a 2.03% dividend yield, it’s one that’ll pay you fairly well to own it, too.
