Tags: canadian | national | railway | high quality | dividend | investment

Is Canadian National Railway a High-Quality Dividend Investment?

Is Canadian National Railway a High-Quality Dividend Investment?
(Paul Mckinnon | Dreamstime.com)

By Wednesday, 16 December 2020 01:30 PM Current | Bio | Archive

Investors often focus on businesses that are domiciled within the U.S. when selecting stocks for investment.

While this does make sense given that these companies are located in the same country that they live, it does preclude investors from taking advantage of attractive investment opportunities in other countries.

One such example could be Canadian National Railway (CNI), which is one of the largest equity positions in the Gates Foundation’s portfolio. Canadian National Railway is a highly profitable company with a long history of growing its dividend, meaning it appears to be a worthwhile consideration for income investors. This article will examine Canadian National Railway’s prospects as a dividend investment.

Background & Potential as a Dividend Investment

With a network of approximately 20,000 route miles, Canadian National Railway is the largest railway operator in Canada. The company handles more than 300 million tons of cargo each year that are worth more than $200 billion. Types of shipments include intermodal, grain, energy products, forest products, automobiles, metals and minerals. Canadian National Railway has a current market capitalization of almost USD$79 billion.

As the largest operator of rail in Canada, Canadian National Railway has a size and scale that remains almost unmatched among competitors. The company’s routes touch three coasts: the Atlantic, the Pacific and the Gulf of Mexico. Customers will likely be attracted to this feature as it allows them numerous regions to ship products to, increasing their reach to locations that they might not otherwise be able to transport their goods to.

In addition, railroads have an extremely high barrier to entry. The capital investment needed to duplicate Canadian National Railway’s infrastructure would be extremely cost prohibitive. Acquiring the land to create a new network would also be difficult. These reasons make it likely that Canadian National Railway’s only competition for rail transport will be the already existing railroads.

The company’s earnings-per-share have increased from $2.10 in 2010 to $4.48 in 2019. This equates to a compound annual growth rate of almost 8% over this period of time. The company is expected to generate earnings-per-share of $4.15 this year, which would be a 7.4% decline on the bottom-line in 2020. This is largely due to the impact from the COVID-19 pandemic.

Income investors also want to see how companies perform during a recession. Listed below are Canadian National Railway’s earnings-per-share results before, during and after the last recession:

  • 2006 EPS: $1.46
  • 2007 EPS: $1.70 (16.4% increase)
  • 2008 EPS: $1.52 (10.6% decrease)
  • 2009 EPS: $1.54 (1.3% increase)
  • 2010 EPS: $2.10 (36.4% increase)

Railroads are not immune to recession given that that a healthy economy often means more robust orders for products that are shipped. Still, Canadian National Railway performed quite admirably during a challenging time.

Just as important to income investors is how a company’s dividend holds up during the weaker parts of the economic cycle. Listed below are Canadian National Railway’s declared dividends in U.S. dollars before, during and after the last recession:

  • 2006 dividends: $0.28
  • 2007 dividends: $0.42 (50% increase)
  • 2008 dividends: $0.38 (9.5% decrease)
  • 2009 dividends: $0.48 (26.3% increase)
  • 2010 dividends: $0.54 (12.5% increase)

In Canadian dollars, Canadian National Railway has raised its dividend for 24 consecutive years. The company has demonstrated a very long history of paying and raising its dividend. Its streak is superior to all of the major publicly traded railroads as well.

Income investors also want to know if there is room for future growth as well. Canadian National Railway’s annualized dividend is $1.79. Using expected earnings-per-share, the company has a payout ratio of 43% for 2020. Canadian National Railway’s 7% dividend increase earlier this year was in the ballpark of its decade-long average raise of 11.6%.

CNI stock has a current yield of 1.6% at the moment. This is nearly in-line with the stock’s 10-year average yield of 1.7%. It should be noted that Canada levies a 15% dividend withholding tax on U.S. investors. However, investors holding Canadian stocks in a U.S. retirement account usually means that the withholding tax is waived.

Final Thoughts

Canadian National Railway has a strong business model with impressive competitive advantages that have been leveraged into a high earnings growth rate over a long period of time. The company has also raised its dividend for nearly a quarter of a century in Canadian dollars. The payout ratio, though elevated, is still reasonable. The yield might be low, but it is nearly identical to its long-term average.

In short, Canadian National Railway appears to have all the necessary characteristics of a high-quality dividend investment.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

© 2021 Newsmax Finance. All rights reserved.


BobCiura
Investors often focus on businesses that are domiciled within the U.S. when selecting stocks for investment.
canadian, national, railway, high quality, dividend, investment
800
2020-30-16
Wednesday, 16 December 2020 01:30 PM
Newsmax Media, Inc.
 
Newsmax TV Live
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved