Some of the smartest Canadian investors have been quietly accumulating shares of Canadian National Railway (TSX: CNR), and it’s not hard to see why. When high-quality businesses temporarily fall out of favour, experienced investors often view the weakness as an opportunity rather than a warning sign. That appears to have been the case with CN Rail over the past year.
About a year ago, the blue-chip railway stock traded near $125 per share, representing a valuation of roughly 17 times earnings — well below the premium multiple investors have historically been willing to pay for the company. As concerns about economic growth weighed on the transportation sector, long-term investors stepped in and took advantage of the discount.
Today, CN Rail trades closer to $165 per share, delivering a gain of about 30% from those lows. While much of the easy upside from valuation expansion may already be behind investors, the company still offers good long-term potential supported by its durable business model and consistent earnings growth.
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A high-quality business with lasting competitive advantages
CN Rail is much more than a transportation company. It operates one of the most important pieces of infrastructure in North America, connecting key markets across Canada and the United States through an extensive rail network that would be impossible to replicate.
The company serves a diverse range of industries, including petroleum and chemicals, grain and fertilizers, metals and minerals, forest products, coal, automotive, and intermodal transportation. This diversification helps reduce reliance on any single sector and provides resilience through different economic cycles.
Perhaps more importantly, CN Rail benefits from enormous barriers to entry. Building a competing rail network would require massive capital investment, regulatory approvals, and decades of development. As a result, CN Rail faces limited direct competition and enjoys strong operating margins, predictable cash flow, and durable profitability.
Growth that continues through economic cycles
Even during periods of softer economic conditions, CN Rail has demonstrated an ability to improve efficiency and productivity. Management consistently focuses on operational improvements such as increasing train speeds, optimizing asset utilization, and enhancing labour productivity.
These efficiency gains help support earnings even when freight volumes face temporary pressure. Looking ahead, under normal economic conditions, investors could reasonably expect earnings per share to grow at an annual rate of approximately 7% to 8%.
That growth may not sound exciting compared to high-flying technology stocks, but it becomes attractive when paired with a stable business model and a reasonable valuation that could lead to more reliable shareholder returns.
A proven dividend-growth stock
Income investors also have plenty to like. CN Rail currently offers a dividend yield of about 2.2%, and the company has increased its dividend for about 30 consecutive years.
While its most recent dividend increase was more modest at roughly 3%, its long-term track record remains impressive. Over the past decade, the company has delivered average annual dividend growth of approximately 11%, supported by steady earnings and payout ratio expansion.
For investors seeking a combination of income, growth, and stability, few Canadian companies have matched CN Rail’s consistency.
Investor takeaway
Smart investors often buy quality businesses when temporary concerns create attractive entry points. That opportunity appeared in CN Rail when the stock traded at depressed valuations last year. While the shares have since rebounded significantly, the company’s essential infrastructure assets, competitive advantages, earnings growth potential, and long history of dividend increases continue to make it one of the most solid long-term investments on the TSX. For patient investors, CN Rail remains a good way to participate in the growth of the North American economy, especially when bought on market corrections.
