CNR – A Core Holding With Continued Growth

CNR - Canadian National Railway

Canadian National Railway TSE:CNRNYSE:CNI is a leading transportation and logistics company in North America. The company owns the only transcontinental railway line in North America. It is a fully integrated rail and transportation services company, providing intermodal, trucking, freight forwarding, warehousing and distribution services.

Canadian National Railway handles over 50% of all Canadian chemicals production and is the top mover of aluminum, iron ore and base metal ore in North America. It is the only rail carrier servicing the three major petrochemical centers in North America. The company transports goods worth more than $250 billion annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods. The company’s product portfolio is well diversified with intermodal accounting for 25% of revenues, followed by petroleum & chemicals, and grains & fertilizers each at 17%. Forest products, metal, minerals, automotives etc. constitute the remainder.

As North America’s leading supply chain player, Canadian National Railway carries more than 300 million tons of cargo annually.

Investment Data

Revenue Growth & Market Exposure

By geography, overseas accounted for 33% of 2018 YTD revenues, followed by transborder (34%), Canadian domestic (17%) and US domestic (16%). The company has an extensive footprint extending all over North America with access to all the three major coasts. Its networks span more than 20,000 miles across Canada and Mid-America, connecting the three strategic coasts of the Atlantic, the Pacific and the Gulf of Mexico. The company is further strengthening its network efficiency and footprint through investments in its track infrastructure. Canadian National Railway has a good network coverage in Chicago which is one of the biggest freight hubs in North America. The company has an advantage of being present in resource-rich and manufacturing-intensive regions.

In order to retain its leading position in the industry, Canadian National regularly invests in capacity additions and network infrastructure improvements. The company has already completed 24 out of the 27 such projects targeted for FY 2018. It is leveraging technology (automation, mobile devices and smart networks) to further improve efficiency and productivity. The company’s commitment to future growth can be gauged from the fact that it invests approximately 20% of its annual revenues back into the company to build for the future. Its investment in long sidings and double track since 2000 has resulted in over 40% higher car velocity and 59% more RTMs.

CNR - Market Coverage
Source: CNR Investor Presentation

As a result of the U.S. Tax Reform (reduction of federal corporate income tax rate from 35% to 21%, effective January 1, 2018), the company’s net deferred income tax liability decreased by $1,700 million in FY 2017. Canadian National is anticipating its estimated annual tax rate to be lower than the previous years.

Increasing industrial and oil and gas production, construction, infrastructure development in North America should act as growth drivers for CNR.The company is also estimating North American industrial production to increase in the range of 2%-3% in FY 2018

Dividends

Canadian National has raised its dividends each year since its IPO in 1995, growing them at 16% CAGR over the last 22 years. It last raised its payout by 10%, paying a quarterly dividend of $0.455 per share. The company has maintained a payout ratio of 25%-35% in the past and is targeting a future payout ratio of 35%. It also has a share buyback program and has repurchased shares worth $21 billion since 2000. Canadian National is implementing a three-month NCIB for repurchase of up to 5.5 million common shares through January 2019.

Canadian National Railway posted strong earnings growth and record free cash flow figures in FY 2017. The company is poised to benefit from strong exports of crude and natural resources, and consumer product supply chain growth. Strong traffic into Prince Rupert and Montreal should drive international intermodal growth. The company exercises a disciplined capital program balancing investments with monetary returns for shareholders. Canadian National Railway intends to invest $3.2 billion in its capital program in 2018.

With more than 100 years of experience under its belt, Canadian National Railway is known for shipping cargoes in a timely and safe manner, which has resulted in sticky customer relations for the company. The company carries a reputation of one of the best-performing transportation and logistics companies internationally. Deep marketing alliances and interline agreements further aid Canadian National to secure connections for consumers across North America. Good diversification across products, geographies and customers helps CNR to better weather economic fluctuations and provides cash flow stability.

Canadian National is expecting its average 2018 EPS ($5.30 to $5.45) to grow by 7.7% year-on-year, driven by volume growth (5% in terms of RTM – revenue ton miles) and pricing improvement. It has registered an EPS growth of 13% CAGR in the past. Industry leading efficiency and long haul investments in people, stock and track infrastructure should drive long term growth.

Competition

Canadian National Railway faces competition from rail as well as other transportation carriers.
The company competes with Canadian Pacific Railway TSE:CP, which is another dominant player in the Canadian rail system and has a presence in most of the industrial areas served by Canadian National.

In addition, other large rail systems in the US also compete with the company in numerous markets. Consolidation in the rail systems in US could lead to the emergence of larger and stronger players competing with Canadian National.

CNR - Competition
Source: CNR Investor Presentation

Bottom Line

Investments in people, assets, network and technology should support CNR’s growth momentum. The railroad behemoth should benefit from strong demand across all its end markets. CN’s capital projects that went online in 2018, should support capacity expansion, volume growth and reduce costs, driving better operational and efficiency metrics.

Canadian Railway has some strong competitive advantages over its peers and is one of the most cost-effective and shareholder friendly railroad companies today. Freight services and railways are an essential component of an economy and as a leading transportation and logistics company in North America, Canadian National is favorably placed to benefit from its position. An extensive asset base, diversification across products, geographies and a decent payout ratio should help the company continue its dividend growth streak in the future.

A company like Canadian National Railway with an oligopoly and demand for moving product should be part of a core portfolio. It is one of my largest holding, see my portfolio. The dividend growth makes up for the lower dividend yield.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
Join 6,000+ Investors & Build a Winning Portfolio