Choosing one of the two railway giants in Canada can be tricky for investors. The business model is similar, and both have a significant international footprint. However, there are differences in their business model, financials, prospects, and, most importantly, their return potential. Both are large-cap stocks and giants based on their assets, footprint, and reach.
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The case for CNR
Canadian National Railway (TSX: CNR) is the largest railway company in the country by market capitalization and has an impressive railroad network. It’s not just the 20,000-mile stretch that makes this network an asset and a major strength for the company, but the fact that it connects three major coasts with this network.
This augments its strength as a significant inland cargo/freight giant. The company has further built upon this strength with a massive trucking fleet — over 8,000 chassis and 8,000 containers. It’s responsible for transporting a significant chunk of Canada’s most important products: petroleum, forestry products, grain, and fertilizer, etc.
As for the return potential, the stock currently offers a good mix of dividends and capital-appreciation potential. The dividends, backed by a solid history, are available at a yield of about 2.1%, and the stock grew almost 100% in the last 10 years. If the stock continues to perform this way, you can expect to double your capital in the next decade and enjoy a decent dividend-based income.
The case for CP
Canadian Pacific Kansas City (TSX: CP) is currently the only single-line railway connecting Canada, the U.S., and Mexico, cutting through the length of the continent. It also has an eerily similar railway network size — 20,000 miles. It has access to multiple significant ports (about 20, compared to CNR’s seven) and offers its customers many of the same benefits that the Canadian National Railway does.
The freight revenue breakdown is quite similar as well, with the transportation of grain, coal, petroleum, and metal and mineral products taking up a sizable portion of its total revenue.
The main difference between the two is in the return potential. When it comes to CP, growth potential takes centre stage and is far more prominent than its dividends. The yield is paltry in comparison — just 0.66%. But the growth potential is more substantial. It grew by about 148% in the last decade, leading to collective returns of about 171%.
Foolish takeaway
If we compare the return potentials head-on, Canadian Pacific Kansas City is a clear winner. The collective return potential is higher, even if the yield is far lower in comparison. The other significant difference is the current growth pace.
CNR is in a bear market phase and has grown by about 40% in the last five years. In contrast, CP’s growth over the same period is 105%. So, in terms of both short-term and long-term growth prospects, CP is the best choice for most Canadian investors. But if you want modest dividend income, CNR might be the better choice.
