Blue chip stocks give investors an additional measure of safety in volatile markets. They have the asset size and financial clout to weather market downtowns or changing industry conditions. Canadian National Railway has increased its efficiency, investing in new trains and new terminals and making equipment upgrades. It is expanding its already strong presence in the U.S. As well, its balance sheet is strong and its dividend looks secure. We view CN as a top quality holding for Canadian investors.
CANADIAN NATIONAL RAILWAY CO. (Toronto symbol CNR; www.cn.ca) operates Canada’s largest railway. Its 32,200- kilometre network stretches across the country and through the U.S. Midwest to the Gulf of Mexico.
CN saw a big jump in the number of goods shipped after the 2008/09 recession. That’s the main reason why its revenue soared 46.2%, from $8.3 billion in 2010 to $12.1 billion in 2014. That figure probably rose to $13.4 billion in 2015.
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Earnings gained 56.9%, from $2.0 billion in 2010 to $3.1 billion in 2014. CN is an aggressive buyer of its own shares. As a result, its earnings per share soared 79.0%, from $2.10 to $3.76.
CN’s close attention to efficiency is a big reason for the higher earnings. In the past few years, it has invested heavily in new trains and terminals, which have sped up deliveries and loading times.
The company’s operating ratio improved from 63.6% in 2010 to 61.9% in 2014 (Operating ratio is calculated by dividing a company’s regular operating costs by its revenue. The lower the ratio, the better.) Thanks to much lower fuel costs, the operating ratio fell to a record 53.8% in the third quarter of 2015.
Blue chip stocks: New deals in U.S. will help CN benefit from expanded Panama Canal
CN also aims to spur growth by increasing its capacity in the U.S. Gulf Coast region. It recently signed deals that will give it better access to terminals being built at ports in Mobile, Alabama, and New Orleans. These facilities will move containers between ships and railcars much more quickly than current terminals.
Deals like these will help CN take advantage of the expansion of the Panama Canal, which should open in 2016. That project will make it easier for ships from Asia to reach the Gulf of Mexico and bypass congested ports on the U.S. west coast.
In 2015, the company likely spent $2.7 billion on new equipment and other upgrades, up 17.5% from $2.3 billion in 2014. A big part of that increase is to comply with new safety regulations in the wake of the July 2013 explosion of a train hauling crude oil in Lac-Mégantic, Quebec.
CN’s balance sheet remains strong. As of September 30, 2015, its long-term debt was $9.2 billion, or a moderate 16% of its market cap. It also held cash of $537 million.
The company gets 80% of its revenue from the U.S., cross-border traffic and overseas clients, so it gains from the lower Canadian dollar. CN’s earnings will probably rise from about $4.38 a share in 2015 to $4.72 in 2016. The stock trades at a reasonable 15.7 times the 2016 estimate. The $1.25 dividend yields 1.7%.
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