Canadian National Railway (TSX:CNR) surged more than 10% in the past eight weeks. Investors who missed the bounce are wondering if CNR stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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CN stock price
CNR trades for close to $162 per share at the time of writing. That’s up from the 2023 low of around $143 and not too far off the 2022 high above $172.
CN plays a strategically important role in the smooth operation of the Canadian and American economies. The rail operator has networks that connect ports on the Pacific and Atlantic coasts of Canada to the Gulf of Mexico. CN moves commodities such as oil, coal, grain, and forestry products as well as cars and finished goods. As the North American and global economies grow, the demand for CN’s services tends to increase.
Railways have limited direct competition on most routes and have been able to pass through rising fuel and other costs to customers in the past few years. This is important for investors who are looking for investments that can ride out the challenges posed by high inflation.
CNR earnings
CN’s third quarter (Q3) 2023 earnings showed the impact of the slowing economy orchestrated by the central banks through their aggressive interest rate increases. Revenue came in at $3.99 billion for the quarter, down 12% from the same period last year. The first nine months of 2023 saw revenue slip just 2% from the first three quarters of 2022.
For the full year, CN is maintaining guidance of flat to slightly lower adjusted diluted earnings per share (EPS). Despite the slowdown this year, the company is still targeting compound annual diluted EPS growth of 10-15% for the 2024-2026 timeframe, supported by strong pricing power, improved efficiency across the business and a recovering economy.
Dividends and share buybacks
CN returns cash to investors through share buybacks and dividends. The board recently increased the current normal course issuer bid that began in January 2023 from $4 billion to $4.5 billion. This is the amount of cash the company can use to repurchase outstanding common stock over the 12-month period.
CN raised the dividend by 8% for 2023. Investors who buy the stock at the current level can get a yield of about 2%. CN might not be an obvious pick for income investors. Still, the company’s compound annual dividend-growth rate since CN went public in the 1990s is around 15%, so the generous increases add up over time, and the steady distribution growth tends to support the upward trend of the share price.
Should you buy CN stock now?
CN deserves to be an anchor position in any buy-and-hold portfolio targeting total returns. Investors who already own the stock should probably continue to hold the position. As we saw in the past two months, there can be a sharp rebound in market sentiment, and you don’t want to miss those rallies.
That being said, new investors might want to wait for the next pullback to start a position. If the economy slides into a deeper downturn than is expected next year, there could be a better entry point on the horizon.
