Better Railway Stock: Canadian Pacific vs Canadian National Railway?

These railway stocks aren’t going anywhere, but while one offers more stability, the other offers more growth potential.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published March 10, 2025 3:45 pm EDT

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Canadian National Railway (TSX:CNR) and Canadian Pacific Kansas City (TSX:CP) are two of the most dominant railway stocks in North America. Each has a long history of powering the economy through freight transport. Both companies play a crucial role in moving goods across Canada and the United States. Yet, these rail companies have different approaches to expansion and operations. Investors often find themselves debating which railway stock is the better buy, particularly in a market where infrastructure plays remain resilient. With CPKC’s recent merger and CNR’s established dominance, it’s time to compare the two and see which one offers more potential for long-term investors.

Into earnings

Looking at recent earnings, Canadian Pacific Kansas City posted strong results for the fourth quarter of 2024, reporting revenues of $3.9 billion, reflecting a 3% increase from the previous year. The railway stock’s operating ratio, a key measure of efficiency, improved to 59.7%, which is a 210-basis-point enhancement. Meanwhile, diluted earnings per share (EPS) climbed 16% to $1.28, demonstrating the benefits of its expanded network and cost efficiencies.

Canadian National Railway, however, faced some challenges in the most recent quarter. The railway stock reported a 2.5% decline in quarterly revenue growth year over year. Meanwhile, its earnings growth dropped significantly by 46.2%. Despite these numbers, CNR remains a highly profitable operation with a strong profit margin of 26.09% and an operating margin of 39.95%, keeping it well-positioned in the long run.

Future in focus

Looking ahead, Canadian National Railway is focused on efficiency and capital investment. The railway stock forecasted 10-15% adjusted diluted EPS growth in 2025 and plans to allocate approximately $3.4 billion towards capital expenditures. Canadian Pacific Kansas City is also expected to accelerate its growth in 2025, leveraging its expanded network and operational efficiencies.

When comparing valuation metrics, Canadian National Railway currently trades at a trailing price-to-earnings (P/E) ratio of 17.77. This makes it more attractively valued than CPKC, which has a higher P/E ratio of 27.01. This suggests that investors may pay a premium for CPKC’s growth prospects while CNR offers a better value relative to its earnings. Additionally, CNR has historically provided stronger returns for income investors, with a forward annual dividend yield of 2.2% compared to CPKC’s much lower 0.66% yield. While dividend growth remains important for many investors, those seeking capital appreciation might favour CPKC’s potential for long-term gains.

Considerations

Despite their differences, both companies share some common strengths. Railways remain one of the most cost-efficient and environmentally friendly methods of transporting goods over long distances. Both CNR and CPKC benefit from strong pricing power, allowing them to pass on inflation-related costs to customers. The established infrastructure and extensive networks also create significant barriers to entry for competitors, reinforcing dominant positions in the industry. While short-term market fluctuations may impact their earnings, the long-term demand for freight transport remains strong, making both companies solid investment choices.

One key risk factor to consider is economic sensitivity. Railways depend heavily on industrial activity, consumer demand, and commodity shipments. If a recession or economic slowdown reduces freight volumes, both CNR and CPKC could see earnings take a hit. Additionally, regulatory changes and infrastructure costs could affect their bottom lines. CPKC’s international exposure, particularly in Mexico, introduces potential risks related to trade policies and currency fluctuations. Meanwhile, CNR’s ability to maintain efficiency amid declining revenue growth will be a crucial factor for investors to watch.

Bottom line

For investors looking for a stable, well-established railway stock with a strong dividend yield and attractive valuation, Canadian National Railway remains a solid choice. Its extensive network, reliable cash flows, and commitment to capital investments make it a dependable option for long-term portfolios. However, for those seeking higher growth potential, Canadian Pacific Kansas City presents a compelling case. Its strategic merger with Kansas City Southern has opened up significant expansion opportunities, particularly as North American trade continues to increase. While it comes with a higher valuation, its earnings momentum and market positioning make it a strong candidate for growth-focused investors.