For more than a century, the railroads of North America have played an essential role in the haulage of commodities across this vast and unforgiving landscape.
In fact, an expansive network of train tracks and infrastructure has been crucial to powering American industry, whether connecting markets, enabling distribution, or fueling production lines.
From coal and lumber to metals and minerals, the efficient shipping of goods has enabled manufacturing to thrive while supporting financial growth throughout the region.
Indeed, by moving freight quickly and efficiently across long distances, the railroad system remains integral to the economy as a primary mode of commerce and the foundation of many other linchpin endeavors.
However, despite the critical importance of the network itself, the business hasn’t always been seen as a dynamic sector worthy of investors’ attention.
For instance, the industry has been beset by a variety of challenges over the years, with its capital-intensive nature making it difficult to generate any meaningful growth.
Evolving competition from other forms of conveyance has further eroded profit margins for those already operating in the space, leading to fewer prospects for expansion or obvious avenues for technological innovation.
Nevertheless, in the face of the increasing popularity of air and ocean freight, some individuals have managed to identify untapped potential in niche markets and emerging geographies where rail is still king.
Among these visionaries is the entrepreneur and philanthropist Bill Gates, whose investment portfolio isn’t limited to computer software and silicon chips and who, with an astute eye for lucrative ventures, has recognized the Canadian National Railway Company (CNI) as a valuable asset at his disposal.
Through its rich dividend history alone, it’s clear this company has stood the test of time. Its strategic location makes CNI a vital link between Canada and several major US cities, making it an essential player in cross-border logistics solutions.
But what is it about Canadian National Railway that has Bill Gates so utterly enamored?
CNI Maintains A Competitive Edge
Established as far back as 1919, the Canadian National Railway Company is Canada’s largest transportation enterprise. Its complex latticework of railroad lines and staging hubs extend from Halifax in the east to Prince Rupert in the west, including all the key ports of the Great Lakes and the most important mercantile centers along the north-south corridor from Chicago to Louisiana.
In fact, because of the scale and reach of CNI’s more than 19,000 miles of rail track, the company enjoys a wide business moat that confers a decisive advantage in the marketplace. Likewise, this creates significant cost benefits for the company, making it difficult for competitors to replicate its operation and compete on monetary terms alone.
On top of that, Canadian National’s intermodal facilities – which enable the seamless transfer of resources between different types of transportation – further strengthen its position. This integrated network is difficult for competitors to match and creates additional value for CNI’s customers.
Moreover, as Canadian National Railway’s business is highly efficient and capital-intensive – thus requiring prohibitive investment in assets such as locomotives and railcars – this results in high fixed costs and economies of scale that benefit legacy players like CNI.
Canadian National’s Growth Story Continues Apace
It’s not only the structural aspects of CNI’s business that makes the company a favorite of the Bill & Melinda Gates Foundation.
No, the corporation’s been performing above par on the financial front as well.
For example, the Canadian National Railway Company’s operating income jumped 35% year-on-year to bring in a record C$1,662 million, while its diluted earnings per share increased 38% to C$1.82.
In fact, CNI’s results were so good that the firm updated its 2023 outlook too. Annual EPS growth is now expected to be in the mid-single digits, with the company still on course to give back C$4.0 billion to shareholders through its 2023-2024 stock repurchase program.
Demand for coal and grain also helped spur a resurgence in CNI’s top line after its total revenues of C$4,313 million were similarly unprecedented for the period.
Is CNI A Buy?
The impact of interest rates on investment decisions is a significant factor to consider when choosing which shares to pick.
With the inflationary environment we’re experiencing today, low-yielding dividend stocks are far less attractive, as investors can simply earn more from high-yield savings accounts or fixed deposits offering better returns.
Interestingly, although Canadian National’s dividend yield stands at just 1.98% – far short of the Fed’s benchmark target of 5% to 5.25%- it might not seem incredibly enticing right now.
That said, the distribution is easily covered with a payout ratio of 37.0%, and the company has recently raised its dividend by 7.8% to boot. It’s also been increasing its dividend for 22 consecutive years, which is another sign that its payout is relatively safe.
But what about valuation metrics? CNI’s share price has been flat over the past twelve months, although it has been rising since the beginning of the coronavirus crisis at the start of 2020.
However, Canadian National Railway’s forward price-to-sales multiple of 6.13 is exceedingly steep compared to the Industrials sector median of 1.28. Furthermore, its PE ratio of 20.40 is no better either.
So, what commends this company from a fundamental perspective?
Well, its net income margin of 30.60% is astronomically high when viewed alongside the competition, while its return on total assets is twice that of its rivals at 10.65%.
And if that’s not enough to persuade you to buy, perhaps Bill Gates’ vote of confidence in the company is enough to change your mind.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.