Wednesday, September 23, 2015

Recent Buy – Canadian National Railway

The stock market is going through some wild swings. There are plenty of reasons for the overall sentiment to be down for active traders, but that just means a great opportunity for long term investors to pick up some quality companies in the midst of the panic. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. This is one last purchase for the month of August, adding to an existing position.

I added to my position in Canadian National Railway (CNR.TO) with 12 shares @ C$72.50. The stock currently yields 1.72% adding C$15 to my forward annual dividends.

Company Overview

Canadian National Railway Company, together with its subsidiaries, engages in rail and related transportation business in North America. It offers transportation services that include rail, intermodal container, and trucking services; and supply chain solutions, including warehousing and distribution, cargoflo, logistics parks, freight forwarding, customs brokerage service, industrial development, and marine services. The company transports various goods, such as automotive, coal, fertilizers, food and beverages, forest products, dimensional and heavy loads, shipping grains, metal and minerals, petroleum and chemicals, specialty crops, and intermodal products. It operates a network of approximately 20,000 route miles of track spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico. It serves the ports of Vancouver, Prince Rupert (British Columbia), Montreal, Halifax, New Orleans, and Mobile (Alabama); and the metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth (Minnesota)/Superior (Wisconsin), Green Bay (Wisconsin), Minneapolis/St. Paul, Memphis, and Jackson (Mississippi), with connections to all points in North America. Canadian National Railway Company was founded in 1922 and is headquartered in Montreal, Canada.

Recent Buy Decision

  • Railroads are the pulse of the economy and are used as a leading indicator of the overall health. A critical industry, transportation of goods across the continent via railroads enjoys a wide economic moat (new companies cannot break into the space easily).
  • The second largest railroad network in North America with approx 20,000 miles of tracks servicing three coasts – Atlantic, Pacific and Gulf coasts. No other network has such a wide varying service network.
CNI map
Canadian National Map
  • I recently recapped the railroad sector (see post here) and CN is the best of the breed with the best operating margins (39.6%) beating out other giants such as Union Pacific (UNP).
  • Absolutely fantastic fundamentals: 5-yr revenue growth 10%, carloads 5%, EPS growth of 14%, adjusted EPS growth of 16%; debt/equity of 0.67.
  • Starting dividends may seem low at 1.72%, but the dividends have been growing for 18 consecutive years making CN a Dividend Challenger. The 1-, 3-, 5-, and 10-yr dividend growth rates are 9%, 11.3%, 15.2%, and 17.4% respectively. The current payout ratio is a low 27.6%, making future increases almost guaranteed.
  • CN has 32% of its revenue generated in the US. With the Canadian dollar falling nearly 13% YTD, that should give an extra boost to this years revenue and earnings.
  • While I do not believe in blindly following other investors, I find comfort to see that Bill Gates’ Cascade Investments LLC has been buying more CN lately and now occupies the second highest portfolio exposure. CN now makes approx 14% of Cascade Investments LLC.
10-yr F.A.S.T Graphs chart for Canadian National (CNR.TO)


  • With the collapse of the commodity market, the overall health of the economy is being questioned. We might still see some downside movement before the economy and the railroad sector recovers.
  • The crash in oil presents some headwinds for the railroads. While the running costs decrease due to fall in oil prices, the bulk of payload growth over the last couple of years was due to crude-by-rail.
  • Development of pipelines presents more headwinds. Transporting via pipelines is cheaper, safer and more reliable (no delays due to weather or other unforeseen circumstances) and railroads will feel the pinch once more infrastructure is in the ground.
  • Transportation by rail, esp volatile payload such as crude oil, can be dangerous. A derailment or other accidents can result in plenty of bad press for the companies.
  • Stricter legislation such as environmental standards mean that utilities and power generation companies are cutting back on dirty coal as a source of energy – again, a decrease in payload for the transportation industry.

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