The locomotive of Canada’s economy keeps charging ahead, even when the broader market hits the brakes. That’s been the story of Canadian National Railway (TSX:CNR) for decades, and 2024 looks no different as this transportation giant continues demonstrating why it deserves consideration as a cornerstone investment for Canadian portfolios.
While tech stocks grab headlines with flashy promises and cryptocurrency creates overnight millionaires (and bankruptcies), CN Rail methodically transports the physical goods that power our actual economy. The company’s 20,000-mile network stretches across Canada and into the southern United States, forming what economists call a “natural monopoly” – infrastructure so vast and essential that competitors can’t realistically challenge it.
What makes CN Rail particularly compelling right now is its position at the intersection of several economic currents. Canada’s resource-heavy economy depends on rail networks to move everything from grain to lumber to manufactured goods. When inflation pushes transportation costs higher, CN Rail’s pricing power allows it to pass these costs to customers who have few alternatives.
“CN Rail benefits from what we call ‘economic moats’ – sustainable competitive advantages that are extremely difficult to replicate,” explains Morley Goldberg, portfolio manager at Richardson Wealth. “Their coast-to-coast network represents hundreds of billions in infrastructure that simply cannot be duplicated in today’s regulatory environment.”
The numbers tell a compelling story. Despite economic headwinds, CN Rail generated $17.1 billion in revenue last year, with an operating ratio (a key efficiency metric in the rail industry) of 60.3%. Translation for non-rail experts: for every dollar of revenue, the company spent just over 60 cents on operations, leaving nearly 40 cents as profit. That’s enviable profitability in any industry.
Then there’s the dividend story. CN Rail has increased its payout for 27 consecutive years, with a five-year average dividend growth rate exceeding 11%. The current yield might seem modest at around 2%, but that consistent growth means investors who bought shares five years ago are now earning roughly 4% on their original investment through dividends alone.
What about valuation? CN Rail trades at approximately 21 times earnings – neither bargain-basement nor exorbitant. However, the premium reflects the company’s quality and defensiveness in uncertain economic times.
“When you’re paying for CN Rail, you’re paying for certainty in an uncertain world,” says Rita Silvan, former editor-in-chief of Golden Girl Finance. “Few businesses have the pricing power, efficiency metrics, and essential economic role that CN maintains.”
The broader economic backdrop adds further intrigue. With Bank of Canada rate cuts potentially arriving later this year, dividend-paying stocks like CN Rail typically become more attractive as fixed-income alternatives lose their shine. Additionally, any infrastructure spending following potential governmental shifts would directly benefit rail networks that transport construction materials.
CN Rail isn’t without challenges. Labour disputes occasionally disrupt operations, as seen in recent contract negotiations. Climate change presents both threats (extreme weather affecting rail lines) and opportunities (increased transportation of alternative energy components). And precision scheduled railroading – the efficiency system pioneered by the late Hunter Harrison – has already captured many of the easiest operational improvements.
But these concerns seem modest against CN Rail’s fundamental strengths. The company continues investing in technology to improve efficiency, including autonomous track inspection cars and advanced logistics software. Their recent $5 billion capital expenditure program focused on network capacity, safety, and technology upgrades demonstrates management’s commitment to maintaining competitive advantages.
For younger investors, CN Rail offers a lesson in compounding. A $10,000 investment in CN Rail twenty years ago would be worth approximately $140,000 today with dividends reinvested. That’s the power of owning businesses that consistently generate superior returns on capital.
“What most investors miss about railroads is that they’re actually technology companies disguised as industrial transportation,” observes Cameron Hurst, chief investment officer at Equitable Asset Management. “The sophisticated logistics, fuel efficiency improvements, and network optimization algorithms give CN Rail continual efficiency advantages that translate directly to the bottom line.”
For environmentally conscious investors, rail transportation offers significant advantages over trucking, producing roughly 75% less greenhouse gas emissions per ton-mile. As environmental regulations tighten, this efficiency advantage could translate to increased market share and pricing power.
The coming years will likely bring both opportunities and obstacles. Supply chain reshoring could increase domestic manufacturing, benefiting rail networks that connect production centers. Conversely, geopolitical tensions might disrupt international trade flows that CN Rail’s network supports.
Through these shifting economic winds, CN Rail’s fundamental characteristics remain attractive: essential infrastructure, pricing power, operational excellence, and financial discipline. For Canadian investors looking to anchor their portfolios with a business that combines defensiveness with growth potential, few options match CN Rail’s compelling profile.
The transportation giant won’t double your money overnight. But for investors seeking the rare combination of safety, growth, and income in an uncertain world, CN Rail continues demonstrating why it deserves consideration as a top Canadian stock for 2024 and beyond.
