CANADIAN PACIFIC RAILWAY LTD. $192 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 153.0 million; Market cap: $29.4 billion; Price-to-sales ratio: 4.2; Dividend yield: 0.7%; TSINetwork Rating: Above Average; www.cpr.ca) has abandoned its plan to merge with U.S.-based railway Norfolk Southern Corp. (New York symbol NSC). The combination would have created North America’s largest railway.
Norfolk rejected CP’s latest offer of about $30 billion U.S. in cash and shares. In addition, U.S. transportation regulators probably would have blocked any deal no matter how CP structured the transaction.
CP’s shares gained 5% on the news. That’s because big acquisitions like this usually come with substantial risk. In addition, investors feel that CP will now use some of the cash it had for the takeover to buy back shares.
In 2015, it repurchased $2.7 billion of its shares. It’s less likely that CP will increase its $1.40-a-share dividend, which yields 0.7%. That’s because many of its investors live in the U.S. and are subject to withholding taxes on dividends from Canadian firms.
Meanwhile, CP should continue to benefit as its investments in new trains and tracks improve its efficiency. Its earnings will probably rise 10.1%, from $10.10 a share in 2015 to $11.12 in 2016. The stock trades at an attractive 17.3 times that forecast.
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