The share price of Canadian National Railway (TSX:CNR) is up 15% from the October low. Investors who missed the rally are wondering if CNR stock is still undervalued and good to buy for a self-directed Tax-free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) focused on total returns.
Canadian National Railway trades near $166 per share at the time of writing. This is up from $144 last fall and not far off the 2022 record high of around $172.
A quick look at the 10-year chart shows that buying CNR stock on dips tends to be a rewarding move for patient investors. The reason for the resilience of the business lies in the strategic importance of the assets for the smooth operation of the Canadian and American economies. CN has a rail network that connects the Atlantic and Pacific coasts of Canada to the Gulf Coast of the United States. The company moves raw materials and retail products ranging from fertilizer, coal, and crude oil to grain, cars and finished goods.
CN generated $12.36 billion in revenue in the first nine months of 2023. This was down about 2% from the same period in 2022, which isn’t too bad considering the challenges the economy has faced amid rising interest rates in Canada and the United States. Operating income slipped 3% through the third quarter (Q3) compared to 2022, and diluted earnings per share (EPS) fell 1%.
CN said it still expected to report flat or slightly negative full-year adjusted diluted EPS in 2023 relative to the previous year. Looking ahead, however, management says the company should generate compound annual adjusted diluted EPS growth in the 10-15% range for 2024-2026. They cite anticipated volume growth that will outpace growth in the economy and expectations to implement price hikes above rail inflation.
CN demonstrated its ability to pass through rising fuel and other rising costs to customers over the past few years. This makes the stock attractive for investors who are searching for businesses that can successfully navigate an environment of higher inflation.
The board raised the dividend by 8% for 2023. Investors should see another solid dividend boost for 2024. CN has a great track record of increasing the distribution since the company went public in the 1990s. At the time of writing, the stock provides a 1.9% dividend yield.
The dividend yield might be low, but the track record of dividend growth and the steady upward drift of the share price are more important. A $10,000 investment in CNR stock 20 years ago would be worth more than $170,000 today with the dividends reinvested.
Should you buy CN stock now?
There is no guarantee that the next two decades will generate the same returns, but investors should consider adding CN stock to their portfolio and look to boost the position on any meaningful pullback.
The sharp rally that occurred in the past two months is a good reminder to investors that trying to catch or predict a bottom during a pullback is difficult, and it is easy to miss out on gains. CN is probably fairly valued right now, but the stock deserves to be an anchor pick in any buy-and-hold portfolio targeting total returns.