Two of Canada’s most widely held dividend stocks – Canadian Pacific Kansas City (TSX:CP) and Canadian National Railway (TSX:CNR) – haven’t had a great year. CP is down about 5.3%, and CNR is off roughly 14.4%.
I’m not worried. If you’ve been waiting to buy these compounders at better valuations, this dip looks like an opportunity despite noise around tariffs or potential labour flare-ups. Here’s why both dividend stocks are on my radar this month.
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CP and CNR’s wide-moat duopoly
Canada’s two Class I railroads operate in what’s effectively a protected duopoly. Building a new transcontinental rail network is next to impossible: the land is already spoken for, rights-of-way are locked up, and the capital required would be astronomical.
Rail is also regulated and benefits from network effects – each additional customer and route makes the system more valuable. Because trucks and ships can’t fully replicate unit-train economics or last-mile rail access, competition is limited.
One additional edge for both railroads is their use of precision scheduled railroading (PSR). This operating model focuses on running fewer, longer trains on fixed schedules instead of reacting to demand with ad hoc service.
The result is lower operating ratios, better fuel efficiency, and higher asset productivity. While critics argue PSR can strain service quality, CP and CNR have shown it helps unlock leaner cost structures and steady margin expansion, reinforcing the strength of their duopoly.
The result is durable pricing power, high asset utilization and, over time, double-digit operating margins and strong returns on equity for both CP and CNR.
CP and CNR’s valuation
On a forward price-to-earnings basis, CNR trades at 15.9 times and CP at 19.6 times. In plain English, for every dollar of expected earnings, you’re paying about $15.92 for CNR and $19.61 for CP.
Flip those ratios over and you get an implied earnings yield of roughly 6.3% for CNR and 5.1% for CP – both comfortably above the current 10-year Government of Canada bond yield near 3.2%.
Income investors also have a tailwind. Dividend yields are elevated because the share prices have fallen while the payouts have continued to grow, which is a blessing in disguise.
On a forward basis, CNR yields about 2.7% and CP about 0.9%. When yields are higher than usual without a change to the underlying business quality, that can be another sign you’re paying a fair price.
The foolish takeaway
Don’t let a share price slide spook you. Nothing fundamental has changed about the economics of moving freight by rail. Unless we invent teleportation, this moat isn’t going away. Tune out the noise, add shares when your plan allows, and trust that CP and CNR will keep compounding earnings and dividends over time.
