Canadian National Railway (TSX:CNR) is down about 7% in the past six months. Contrarian investors are wondering if CNR stock is now undervalued and good to buy for a self-directed Tax-Free Saving Account (TFSA) or Registered Retirement Saving Plan (RRSP) focused on dividends and total returns.
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CNR stock price
Canadian National Railway trades near $157 per share at the time of writing. The stock was as high as $180 earlier this year and is off the 12-month low of around $147.
Operations
CN operates roughly 20,000 route miles of tracks from the Atlantic to the Pacific in Canada and down through the United States to the Gulf of Mexico. The rail operator provides strategically important services that are essential to the smooth operation of the Canadian and U.S. economies.
CN moves cars, crude oil, coal, grain, fertilizer, forestry products, and finished goods. When one segment hits a slump, the others typically pick up the slack. CN generates significant revenue in the United States, which gives Canadian investors good exposure to the American market through a Canadian stock.
Wildfires and labour disputes have interrupted operations in the past year. Natural disasters are becoming more frequent and more severe in Canada, so these issues need to be kept in mind when considering CN stock. The labour disputes at CN and Canadian ports come up from time to time. The current round of disruptions will get sorted out and these are temporary issues.
Tariff risks
Donald Trump recently said he intends to place 25% tariffs on goods coming to the U.S. from Canada. If the tariffs actually go into effect, there would be a major economic disruption between the two countries, with Canada likely to slide into a recession. CN would probably see a drop in shipments along its routes as a result.
At this point, analysts speculate that the tariff threats are simply a negotiating tool and that the final outcome won’t be as dire. The next year will likely see some volatility in markets as the negotiations progress.
Opportunity
CN has a long and steady track record of growth, supported by the expansion of the Canadian and U.S. economies. Speed bumps are expected along the way, but the long-term trend should be positive for both CN and its shareholders.
Dividends
CN is one of the best dividend-growth stocks on the TSX over the past three decades. The board has increased the payout steadily since CN went public in the 1990s. At the current share price, the dividend yield is 2.15%.
Earnings
CN is a very profitable company. Adjusted net income for the first three quarters of 2024 came in at $3.36 billion. This is down, however, from $3.495 billion in the same period the previous year. Total revenues rose to $12.69 billion from $12.37 billion in the first three quarters of 2023, but operating expenses also increased, leading to a drop in profits.
Outlook
Management expects 2024 to 2026 compound annual adjusted diluted earnings per share (EPS) growth to be in the high single digits. Adjusted return on invested capital is expected to be in the 13-15% range. If the company hits these targets, the stock should move higher.
Time to buy CN?
A quick look at the long-term stock chart suggests that buying CN stock on dips tends to be a savvy move for patient investors. Given the uncertainty with trade negotiations between the U.S. and Canada over the coming year, contrarian investors might want to consider taking a half position at the current level and look to add to the holdings on any additional weakness.
