Summary
-Canadian National Railway (TSX: CNR, NYSE: CNI) is a prominent and diverse North American railway.
-Five year revenue growth is between 2% and 3% annually.
-Five year earnings growth is approximately 8% annually on average.
-The balance sheet is strong.
-The current dividend yield is approximately 2%, with the last increase yielding an approximate 7% growth of the dividend.
-P/E is a little over 15 at the time of this writing.
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Overview
Founded in 1918, Canadian National Railway is the largest railway in Canada and has significant operations in the United States. The rail network extends from the Atlantic Ocean to the Pacific Ocean through Canada, and also extends southward to the Gulf of Mexico through the United States. The total mileage of track exceeds 21,000.
The company is divided into seven business segments:
-Petroleum and Chemicals
-Metals and Minerals
-Forest Products
-Coal
-Grain and Fertilizers
-Intermodal
-Automotive
Revenue, Earnings, Cash Flow, and Margins
Revenue growth has been slow, but increasing company efficiency has allowed substantial earnings growth.
Revenue Growth
Year | Revenue |
---|---|
2009 | $7.367 billion |
2008 | $8.482 billion |
2007 | $7.897 billion |
2006 | $7.716 billion |
2005 | $7.240 billion |
2004 | $6.548 billion |
Over these five years, CNI has grown revenue by between 2% and 3% annually, on average.
Before the economic crisis, Canadian National Railway was consistently growing revenue. Revenue growth was over 6% annually between 2004 and 2008.
EarningsGrowth
Year | Earnings |
---|---|
2009 | $1.854 billion |
2008 | $1.895 billion |
2007 | $2.158 billion |
2006 | $2.087 billion |
2005 | $1.556 billion |
2004 | $1.258 billion |
CNI has grown company earnings by an average of 8% annually over the past five years.
Operating Cash Flow Growth
Year | Cash Flow |
---|---|
2009 | $2.279 billion |
2008 | $2.031 billion |
2007 | $2.417 billion |
2006 | $2.950 billion |
2005 | $2.705 billion |
2005 | $2.139 billion |
Cash flow growth over the past years has averaged 1%.
Profit Margin
Canadian National Railway has a profit margin of 27%.
Dividends
CNI currently has a dividend yield of about 2%, with moderately high dividend growth and a low payout ratio.
Dividend Growth
Year | Dividend | Yield |
---|---|---|
2009 | $1.01 | 2.00% |
2008 | $0.92 | 1.80% |
2007 | $0.84 | 1.70% |
2006 | $0.65 | 1.60% |
2005 | $0.50 | 1.50% |
2004 | $0.39 | 1.50% |
Over these past years, CNI has grown the dividend by an average of nearly 21% annually.
The most recent increase, from 2009 to 2010 was from $0.2525 per quarter to $0.27 per quarter, an increase of about 7%. The payout ratio is currently only 23%, so there is plenty of room for the dividend to grow. It should be noted that CNI has increased its dividend for the past 14 consecutive years.
In addition to the dividend, CNI returns value to shareholders in the form of share buybacks. At year end of 2006, there were approximately 525 million shares outstanding, and that number is down to approximately 470 million now. This represents an approximate 10% decrease over this time period.
Balance Sheet
CNI has a great balance sheet, with a Total Debt to Equity ratio of 0.56.
Investment Thesis
Railroads still serve a big part in world transportation. They remain the most efficient way of transporting large amounts of material far distances. From an investing point of view, railways also have among the very strongest of economic moats, in that they are established businesses where new competitors are scarce. Obstacles to starting up a new railway business are obvious.
Canadian National Railway is a very diversified business, with seven different operating segments in a wide geographic area. No operating segment accounted for more than 18% of total company revenue. Geographically, 19% of revenue came from US domestic traffic, 28% came from inter-border traffic, 24% came from Canadian domestic traffic, and 29% from overseas markets.
Growth opportunities for Canadian National Railway include the possibility of a recovering world economy, areas for increased efficiency, and acquisitions. The balance sheet is strong, and the dividend is consistent, growing, and moderately sized.
When everything is considered, the choice to invest or not invest in CN Rail should depend not on the short-term economic outlook, but instead on one’s opinion of the long-term viability of the North American economy, the place that railroads have in that economy, and CN Rail’s ability to prosper or falter in the place that they have to operate.
Risks
Like any business, CNI has investment risk. They are susceptible to changes in the world economy and particularly the North American economy of Canada and the US. A long downturn in US or Canadian production could result in poor performance of CNI stock. They also are susceptible to changes in fuel cost.
Conclusion and Valuation
CNI looks like a great company that offers a pretty good dividend and growth opportunity. With a current P/E of about 15, the price is neither particularly high or low, but I would like to see it a little bit lower, perhaps in the upper $50s on the NYSE stock exchange.
Full Disclosure: I do not have any position in CNI at the time of this writing.
You can see my full list of individual holdings here.
Further reading:
CVS Caremark Corporation (CVS) Dividend Stock Analysis
Consolidated Edison (ED) Dividend Stock Analysis
Procter and Gamble (PG) Dividend Stock Analysis
Smuckers (SJM) Dividend Stock Analysis
8 Reasons to go with Dividends