Railways are often regarded as the arterial veins of the North American economy. That’s because of the sheer volume and differing amounts of freight that they haul at low costs and low emissions over huge distances. But which is the better railway for investors?
The answer isn’t a simple choice. Railways have different track networks that often serve different markets. By extension, this means they have access to different ports and offer different goods.
In Canada, the two major railways are Canadian National Railway (TSX: CNR) and Canadian Pacific Kansas City (TSX: CP). Both are considered among the largest railroads in the industry (known as “Class I”).
But which one is the better railway stock? Let’s answer that by outlining a case for both.
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The case for Canadian National
Canadian National’s network extends from coast-to-coast across Canada and down through the Midwest United States to the Gulf Coast. This creates a diversified mix of customers and routes with access to three coastlines.
That unique mix allows Canadian National to operate with a high degree of diversification, which is evident in the railway’s cargo loads.
Canadian National hauls everything from raw materials, automotive components, chemicals and crude oil to precious metals and wheat. In total, Canadian National hauls approximately $250 billion worth of goods across its vast network each year.
This allows the railway to operate a profitable business with strong returns on capital and provide steady dividends.
That dividend is another key point. As of the time of writing, Canadian National offers investors a 2.6% yield. Even better, Canadian National has an established history of providing consecutive annual increases to that dividend, a streak that goes back three decades.
For investors looking at building an income stream that offers growth, Canadian National could be seen as a better railway stock option.
As of the time of writing, Canadian National trades at a P/E of 18.5.
The case for Canadian Pacific
Canadian Pacific Kansas City operates a smaller network than Canadian National when compared by revenue. Where Canadian Pacific’s network differs is in terms of its network.
Following the 2023 acquisition of Kansas City Southern, Canadian Pacific’s network now connects Canada, the U.S. and Mexico into a single line. That unified network has the potential to capitalize on cross-border trade and nearshoring trends.
Whereas Canadian National is in a more operational phase, Canadian Pacific is focused on integrating its network and building out services following the merger. This means that prospective investors evaluating Canadian Pacific may see lower returns on capital compared to Canadian National.
Where Canadian Pacific comes out as the better railway stock is in revenue growth. This sets Canadian Pacific up as a more growth-first investment. The unique long-term appeal of the Canada-U.S.-Mexico corridor should not be dismissed by prospective investors.
That growth-first view is also reflected in the railway’s smaller dividend yield. As of the time of writing, Canadian Pacific’s yield is just 0.91%.
The railway trades at a P/E of 21.6.
Which is the better railway stock?
Both Canadian National and Canadian Pacific make compelling cases, but for different types of investors.
Canadian National offers stronger profitability and a significantly higher dividend with decades of history. This makes it the default pick for investors seeking defensive appeal and income generation as well as growth.
Canadian Pacific, on the other hand, offers investors a high-growth route. The higher risk today, while that network continues to get integrated and built, could result in growth over the longer term. The trade-off is the lower dividend.
The better railway stock ultimately comes down to investor goals.
Either way, they are both stellar picks that offer defensive appeal and growth. This makes them ideal for any well-diversified portfolio.
