Strong Fundamentals with CP

CP - Canadian Pacific Railway

Canadian Pacific Railway is a leading Canadian transportation company that moves goods and commodities from Montreal to Vancouver in Canada and in the U.S. Midwest and Northeast regions. The company has easy access to international markets with its large 13,000 miles of rail network, more than 100 transload facilities across Canada and the U.S. and linkages to key ports on the east and west coast. Canadian Pacific operates the shortest and fastest routes in key lanes across Canada and the U.S. Its transcontinental service provides the fastest service between Eastern Canada, Calgary, and Vancouver.

Canadian Pacific is known for its reliable and efficient movement and delivery of critical goods to a diversified group of customers in the automotive, food products, energy, industrial and other key markets. It is the only Class 1 railway with significant grain franchises in both Canada and the US. Bulk goods comprised 40% of Canadian Pacific’s 2019 freight revenue followed by Merchandise Goods (39%) and Intermodal (21%). With decades of experience, Canadian Pacific has established long-standing relations with Class 1 and short-line railroads. By geography, global business (Asia and Europe) accounted for ~37% of 2019 freight revenues, while cross-border and domestic comprised 32% and 31%, respectively.

Investment Data

Revenue Growth & Market Exposure

Canadian Pacific Railway provides critical services to a highly diversified customer base by moving goods and commodities reliably and efficiently. The company moves 85% of Canadian export metallurgical coal, and ships 70% of potash moving in North America. It has sufficient room for future growth given its ability to increase the train length, network, terminal capacity expansion, and surplus land and locomotives availability. Customers prefer rail-based transportation as it is the safest, cost-effective, and environmentally friendly means to ship. Canadian Pacific is trusted by reputed names like Shell, ExxonMobil, Honda, Suncor, Loblaw, Home Depot, Cenovus, Cargill, etc. The company has a sound track record of strong performance in the domestic intermodal and is revamping its product offering in the international intermodal. The company is further investing millions of dollars in building new high capacity grain hoppers, which is expected to increase by 25% more grain transport per train.

CP - Revenue Ratios

Canadian Pacific is in a good position to leverage its leading market share in the Canadian railroad industry and take advantage of Canada’s growing trade industry. The company is known for its high efficiency and recorded an improvement of 5% in the network train speed, 11% in car miles per day, 5% in locomotive productivity, and strong safety performance. Train accidents and personal injuries both declined by 31% and 10%, respectively. Canadian Pacific should benefit from the strong fundamentals for grain, potash, and coal. Positive news around U.S. trade settlements and talks with China should encourage commodity exports.

On the merchandise front, CP continues to drive success through its impeccable service, strong utilization of its assets and transloads network. The company’s transload strategy is poised to succeed given its unique terminal capacity and land for low-cost expansion. CP is undergoing several development opportunities to create multi-commodity transload at its terminals across Canada and the U.S., similar to its efforts in Vancouver and Toronto. It closed the acquisition of the Central Maine & Quebec (CMQ) railroad in December, which will offer the shortest routes from the Maritimes to Montreal, Toronto, Chicago, and Western Canada.

Canadian Pacific is all set to gain from the construction of a diluent recovery unit (DRU) near its rail terminal at Hardisty, Alberta which will enable its franchises to enjoy sustainable crude supply by rail that will be safer, cost-competitive and allow efficient movement for the long-term. The DRU facility is expected to come online in 2021. In the automotive segment, CP is positive about its unique inland terminal capacity across its network. It is looking for opportunities to open new auto compounds that will further enhance its value proposition in this sector.

Canadian Pacific continued to deliver revenue growth and record low operating ratio amidst volatile environment and micro headwinds in the last year. An industry leading network, access to strategic ports and leadership in transporting key commodities are Canadian Pacific’s major advantages. CP has a strong pipeline of unique opportunities to add incremental volumes.

Dividends

Canadian Pacific has grown its dividend by more than 21% CAGR over the last three years and last raised it by 27%. It has increased its dividend for four consecutive years and has an average annual yield of 1% currently. A low payout ratio of 19% provides plenty of room for future dividend growth. It returned over $1.5 billion to shareholders through share buybacks and dividends in 2019.

Canadian Pacific repurchased more than 31 million of its shares from 2015-2019. The company completed the 4% share buyback program launched last October and announced a new 3.5% share buyback program to repurchase up to 4.8 million shares over the next 12 months, in December. Canadian Pacific has returned nearly $9 billion to its shareholders in dividends and share repurchase, over the last five years. Its earnings have also grown at a rate of 22% CAGR over the last five years. The company is targeting a 25%-30% dividend payout ratio over the long term.

The railroad is a highly capital intensive business constantly requiring upgrades to networks and railroads and large investment in capacity expansion. Canadian Pacific has increased its trains’ length and speed by 9% and 19%, respectively over the last five years. The company is also investing in network upgrades. Its strong pipeline of high return projects should support dividend growth in the future. A highly diversified customer and industry base provides it the much needed immunity from industry fluctuations and helps in achieving safe and secure cash flows. Investors can, therefore, expect dividends to comfortably grow in the mid to high double-digit range going forward.

CP’s cost discipline has enabled a strong free cash flow generation. The company recorded an increase of 5% in free cash to $1.4 billion in the last year. A disciplined approach to capital investments and the strong returns should continue to drive margin improvement. 2019 marked the second consecutive year of CP being the industry leader in volume growth and registering double-digit earnings growth. The company is targeting mid-single-digit RTM growth and high single to low double-digit earnings growth for the full year.

Competition

Canadian Pacific suffers competition from other railways, motor carriers, ship and barge operators, and pipelines. Canadian National Railway and BNSF Railway Company are its primary competitors, operating in Canadian Pacifics’ major territories. With extensive years of experience under its belt, Canadian Pacific Railway has gained the reputation of a global transportation solution provider. The company operates in a highly regulated environment which acts as a significant entry barrier for any newcomer.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderAmbassadorAchieverAristocratKingGraph
CNRCanadian National RailwayIndustrialsTransportation & Logistics61107.7954.3818.4918.495.832.1339.4542.3015.47YESYESYESNO1
CPCanadian Pacific RailwayIndustrialsTransportation & Logistics46304.6041.9017.5217.5217.521.0918.9543.3210.85NONONONO1
TFIITFI International IncIndustrialsTransportation & Logistics5730.302.677.967.963.803.4327.3741.043.43NONOYESNO1

Bottom Line

Canadian Pacific should comfortably continue its dividend growth streak in the future as it can slow down share buyback before slowing the dividend. It is uniquely positioned to leverage its low-cost base and best in class service to grow with its customers. As a leading railroad transporter, Canadian Pacific should benefit from increasing crop production in North America and rising global grain demand. The company’s aggressive investments towards enhancing its network capacity, track infrastructure, modernizing and replacing rolling stock and containers, and driving supply chain efficiency should support future growth. Canadian Pacific has enough room to grow its footprint given its large number of locomotives, huge yard and terminal capacity, growing network capacity and surplus land.

In the short term, there will be adjustments due to the economic impact from the COVID-19 virus. As for the oil war impact, there may also be a slow down but the cost of oil doesn’t change the weight and transport cost. The economic slow down of goods and production is what needs to be watched to understand the longterm impact on the revenue.

CP vs Indexes

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.
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