I don’t usually make prediction but as an investor looking for long-term growth in my dividend investments, the railway fits the bill perfectly. I am a late investor to the railway but the more I looked into the business, the more this oligopoly makes sense for me as an investor. Are we really building more railways? Yet, those companies are continuously growing their revenue. It’s simple, railways offer the best transportation method for moving goods around North America. The competitors are just not as cost effective due to the cost of oil.
Competitors to Railway Stocks
Airlines vs Railway
The bottom line is really the challenge here. Airlines have to spend money on fuels and fuel prices are only going up. Energy efficient airlines are not really in the short term horizon. On the other hand, railway motor cars are evolving and cost can go down as well as having the ability to better predict shipment arrival.
Trucks vs Railway
Trucks just can’t compete on load alone. The number of drivers needed along with the maintenance requirements would not make this a really cheap alternative. Obviously, the trucking business booms when the railway business grows as you still need a truck to go from the train to the outbound cities.
Pipelines vs Railway
Pipelines can definitely take a bite out of the railway business but they are very expensive to build and requires a lot of approvals. The environmental consideration is huge and the cross country negotiations even bigger. However, it is a definitive competitor as a new pipeline in one of the railway area would drastically affect the amount of oil or natural gas cargo for that railway company.
Cargo Ships vs Railway
No immediate competition since railroads don’t go on water and vice versa but I felt it prudent to surface it as a ship can arrive at ports where your selected railway company does not operate. Both actually can complement each other in moving goods between continents.
Best Railway Stocks
Before we look into the different railway companies, let’s have a look at the railway network. It’s pretty clear that there exists only a handful of players on the west coast where imports/exports are booming.
Canadian Railway Stocks
Canada only has 2 players in the railway business and both trade on the US stock exchange as well. On a side topic, the railway history across the Rockies is very interesting. There is an old abandoned railway tunnel near the Vancouver area built to compete on the arrival to the west coast. It was deemed too dangerous to keep and it makes for a very nice sightseeing trip.
1. CNR – Canadian National Railway
Canadian National Railway TSE:CNRNYSE:CNI will not give you a good dividend yield but you will see consistent dividend growth and very good stock appreciation. CNR is a Canadian Dividend Aristocrats and also a candidate for the 10 – 10 dividend growth rule with 10% dividend growth on average. This is one of the stocks I should have bought early but the low yield kept me at bay.
- Dividend Yield: 1.67%
- P/E: 18.20
- Market Cap: 43.73 B
- Year-To-Date Growth: 13.72%
- 5 Year Growth: 122.1%
- 10 Year Growth: 369.04%
I use the rule of 72 to assess how long it takes to double my money. With 10% interest/growth, it would take 7.2 years to double so you can imagine that if you double your money in 5 years that you have great growth! I plan to add more funds to CNR through my portfolio rebalancing. It will affect my short term dividend income but my portfolio will be more performant.
2. CP – Canadian Pacific Railway
Canadian Pacific Railway TSE:CPNYSE:CP is recovering from a major change in management. Their efficiency just wasn’t there and it wasn’t comparable to CNR. However, their new boss is the previous CNR CEO and he should be able to bring efficiency back. You may wish to be patient and wait for the efficiency or still to CNR.
From a numbers perspective, the growth seems to be very similar. That’s one reason why I like the railway sector. It’s an oligopoly with a wide moat. However, the P/E is a ticking bomb compared with CNR. If the changes by the CEO were to take longer, CP could see a drop in price to a more natural valuation.
- Dividend Yield: 1.10%
- P/E: 39.64
- Market Cap: 22.27 B
- Year-To-Date Growth: 26.08%
- 5 Year Growth: 101.76%
- 10 Year Growth: 314.91%
U.S. Railway Stocks
From my research, there are 4 major players in the US. I am not as familiar with all the US railway companies and their details but I am positioning them based on their ability to profit from the self-sufficient oil producing goals and their ability to deliver that oil to refineries. Interestingly enough, none of the US railways are US dividend aristocrats.
1. UNP – Union Pacific Corporation
I listened to a really good segment on Cramer’s Mad Money about Union Pacific NYSE:UNP Corp. and the CEO of Union Pacific Corporation was interviewed. The major points were that UNP is well positioned to benefit from the American oil boom as well as the Mexican car manufacturing. It has a large network between central and western US and derives its revenue from multiple sources (6 total). UNP is a dividend grower but far from targeting being a dividend aristocrat since it kept its dividend flat between 2004 – 2006.
- Dividend Yield: 1.75%
- P/E: 18.48
- Market Cap: 73.51 B
- Year-To-Date Growth: 25.26%
- 5 Year Growth: 118.97%
- 10 Year Growth: 444.91%
2. KSU – Kansas City Southern
Kansas City Southern NYSE:KSU is established in the central united states with routes flowing in and out of Mexico taking advantage of all the ports in the Gulf of Mexico. It is well positioned to continue to profit from the import of oil as well as the outsourcing of auto manufacturers. With its central positioning, it can bridge the east and west coast together through its partners. KSU is strong on the east coast with some central locations. When you look at the maps between UNP and KSU, they each have exclusive usage of separate but complementary sectors. If the two were to merge, they would cover the entire country. KSU also has a well-diversified transport spread across 7 sectors. They are mostly raw materials with the exception of automotive.
- Dividend Yield: 0.76%
- P/E: 30.56
- Market Cap: 12.41 B
- Year-To-Date Growth: 34.87%
- 5 Year Growth: 173.68%
- 10 Year Growth: 837.47%
3. NSC – Norfolk Southern Corp.
While UNP pretty much owns the west coast in terms of tracks, Norfolk Southern Corp. NYSE:NSC covers the east coast though. Since a lot of the major centers are located on the east coast, it’s fair to say that NSC is well positioned to continue to serve those centers. However, as manufacturing moves to cheaper locations so does the transfer of natural resources which can cause a reduction of natural resources transport.
- Dividend Yield: 2.77%
- P/E: 13.03
- Market Cap: 22.79 B
- Year-To-Date Growth: 16.96%
- 5 Year Growth: 22.78%
- 10 Year Growth: 272.45%
4. CSX – CSX Corporation
CSX NASDAQ:CSX is also located on the east coast competing directly with NSC. It makes for a competitive market for the east coast and definitely allows for the other players to negotiate their rates with them. With the size of both NSC and CSX, there definitely appears to be room for 2 major players but in the end, UNP and KSU are positioned to own their area respectively. Growth might have to come from other sectors such as trucking or freight and acquisitions. The P/E reflects that it isn’t priced for growth at the moment, unlike KSU.
- Dividend Yield: 2.58%
- P/E: 12.87
- Market Cap: 23.77 B
- Year-To-Date Growth: 17.89%
- 5 Year Growth: 21.65%
- 10 Year Growth: 358.33%
The first aspect of owning a railroad company is to understand where they operate and where their revenue is coming from to assess if they can benefit from economic changes. At the root though, it’s one of the best methods of transportations and will continue to be so for many years.
The Railway Stocks have profits for you
It’s clear that the past 10 years, the railway companies have grown tremendously. They are not cheap stock to DRIP as you need are really large amount. If you want yield right now, NSC and CSX are your holdings of choice, however, CNR and CP are consistent dividend growers and their yield is only low because of the continuous stock appreciation.
Key points of research for me are:
- Railway Network – the west coast and central locations are very important for the coming years
- Efficiency – Are they operating effectively
- Growth Consistency – With a relatively low yield, there needs to be growth.