If you’re considering getting into railway stocks, we’re pretty lucky here in Canada. We’re part of a duopoly, and there is very little wiggle room for really any outside companies to make their way into our borders. Yet when it comes to choosing between Canadian National Railway (TSX: CNR) and Canadian Pacific Kansas Southern (TSX: CP), to me, the choice is obvious. CNR stock simply looks more valuable today.
Image source: Getty Images
Dominant and leading
Before we get into the tit-for-tat between these two stocks, let’s first focus on what makes the railway sector so strong in the first place. CNR Stock operates a huge rail network across both Canada and the United States. It holds access to all three coasts, industrial centres, and distribution hubs. Furthermore, it continues to provide a competitive advantage for transporting a wide range of goods.
Plus, CNR stock and railways, in general, are part of essential infrastructure. As a component of the supply chain, they’re supported publicly and privately. And given CNR stock’s efficient operations, this has led to the company being quite profitable over the years.
The stock has, therefore, seen consistent earnings that, while they may drop during downturns and bad weather, recover quickly. This has allowed the stock to increase its dividend year after year, with a strong track record of returning that value to shareholders.
Why it’s different
So, what makes CNR stock different from CP stock in this case? A few things. First off, CNR stock is the larger of the two still. It operates both in Canada and the U.S., with 20,400 route miles of track. It reaches the Atlantic, Pacific, and Gulf coasts, and again, many population hubs in between.
Even after the merger of CP stock and KCS, the company was behind slightly at 20,000 miles. So, it still remains dominant even after the huge investment. And it was huge. The company is paying US$31 billion for the acquisition, and this will be a debt that will need to be paid off for years.
Plus, CNR stock has a history when it comes to its operational efficiency. It’s been able to move everything from heavy machinery to oil and gas. While CP stock has made strides, it’s still improving. What’s, CNR stock has more global exposure with access to Asian markets from its Atlantic and pacific coastal network.
Financially focused
After years of trying to focus on growth, CNR stock is also now focused back on its routes. That’s maintaining its position as a Class I railroad. This comes from its lowest operating ratio and precision railroading dating back to the 2000s.
CNR stock should be able to continue demonstrating strong free cash flow and strengthening its bottom line for top-line growth in the future — should the right opportunity arise, that is. One that won’t upset shareholders as it potentially did with some CP shareholders.
Overall, the company is a strong one. It holds an average return on invested capital of 15.9% over the last decade. That’s huge and the highest among the most valuable stocks on the TSX today. So, if you’re looking for stability, growth, and returns, then CNR stock is certainly one of the top purchases to consider right now.
