Investors who missed the big rally in the TSX this year are wondering which top Canadian stocks might still be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividend growth and total returns.
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Canadian National Railway
Canadian National Railway (TSX:CNR) trades near $130 per share at the time of writing. The stock is 20% below where it sat a year ago and way off the $180 high it hit in early 2024.
The troubles in 2024 included labour strikes at both CN and major ports. CN operates roughly 20,000 route miles of tracks running from the Pacific and Atlantic coasts of Canada down to the Gulf Coast in the United States. Wildfires also disrupted operations in the summer of 2024. The combination of the various issues forced some customers to find alternative routes for moving their goods. As a result, CN’s total revenue growth for 2024 was minimal and adjusted earnings dropped due to higher expenses. This had a negative impact on CN’s operating ratio, which is a key measure of efficiency in the rail industry.
2025 started out on an optimistic note, despite the brewing tariff storm clouds. In the Q1 2025 earnings report released on May 1, management provided upbeat guidance for the year. CN generated revenue and operating income growth of 4% compared to Q1 2024. Diluted earnings per share (EPS) rose 8%. CN reaffirmed its 2025 outlook for 10% to 15% growth in adjusted diluted EPS.
The strong start to the year might have occurred as a result of businesses pushing through orders to build inventories ahead of the start of the U.S. tariffs. CN’s Q2 2025 adjusted EPS rose 2% year-over year, but revenue slipped 1%. The guidance for the rest of 2025 was not as rosy as the previous report. In fact, CN lowered its expectation for adjusted diluted EPS growth to less than 10%, citing economic uncertainty caused by tariffs and ongoing trade negotiations.
Risks
Consolidation in the North American rail industry is the big news in recent months. Union Pacific wants to buy Norfolk Southern in a deal that would create a coast-to-coast American rail giant. The deal has to clear some significant regulatory hurdles, but the plan has forced CN and its peers to look for ways to adjust to the potential merger of UP and NS.
CN’s American lines run from Canada south to the Gulf Coast. The company just announced a plan with CSX to develop a new intermodal service serving Nashville that would eliminate a current trucking leg and provide a seamless connection from Canada’s West Coast to this strategic rail hub. The deal builds on another agreement between the two railways initiated in 2019 to serve the East Coast.
The idea is that these partnerships can benefit both the railways and their customers without having to go through the challenges of merging the businesses.
On the economic front, trade headwinds persist as negotiations between the United States and key trade partners, including Canada, Mexico, and China remain unresolved. Economists increasingly expect a recession in Canada and the U.S. next year if trade clarity doesn’t arrive.
Upside
The long-term outlook should be positive for CN. Trade deals will eventually get done and economic growth will expand in the United States and Canada. This will benefit CN as demand rises for its services. A new openness to collaborate with other railways should also help CN and its peers.
CN remains very profitable and continues to invest in growth projects. The board is using excess cash to buy back stock while the share price is under pressure, and the dividend should continue to increase at a steady pace. CN has raised the payout in each of the past 29 years.
The bottom line
CN is a contrarian pick right now, but buying the stock on pullbacks has previously proven to be a profitable move for patient investors. If you have some cash to put to work, CN deserves to be on your radar.
