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Sunday, May 10, 2015

An Investment in Canadian National Railway Company - CNR

If we're trying to avoid wild wild west, cow-boy style investing, one of the ways of doing so responsibly is by putting your money for the long run in mature, proven and stable businesses. One of the tenets often mentioned is the company's "moat". "You want to invest in companies with a moat". In other words, you want to invest in companies with a distinctive built-in competitive advantage where the barrier of entry for new competitors is a huge obstacle to overcome.

Railways fall in this category. Building a whole infrastructure across vast regions takes billions of dollars and years of work, so, the established companies, the incumbents, pretty much have guaranteed business for years to come without too much concern about potential new competitors. Goods always need to be transported from manufacturers to consumers and railways are still, to this day, the most cost efficient way for transporting them in large volumes throughout large distances. Better than Planes and Trucks by far.

An Investment in Canadian National Railway
Symbols: CNR.TO (Toronto Stock Exchange), CNI (New York Stock Exchange)

Taken from Google Finance:
"Canadian National Railway Company (CN) is engaged in the rail and related transportation business. CN's network and connections to all Class I railroads provide its customers with access to all three North American Free Trade Agreement (NAFTA) nations. CN derives its freight revenue from seven commodity groups representing a portfolio of goods transported between a range of origins and destinations. The Company's 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, serving 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."

CNR's history as a public company goes back to November 22, 1996.

How would a $10,000 investment in CNR have fared since then (18 and a half years)?

A $10,000 investment in CNR on November 22, 1996 with dividends reinvested in the stock would have been worth $232,636 on May 10, 2015. That is an Average Annual Return of 18.58% in a period that, let's not forget, includes the 2000 dot com bubble burst, 9-11 terrorist attacks, Wars, the 2008 market correction (second worst in history), the 2011 debt ceiling issues in the US, the European debt debacle. Your initial investment would have been multiplied 23 times over. You would now own 2,953.20 shares, each one of them paying you $1.252 per year in dividends for a total passive income of $3,697 per year.

This is a pretty smooth equity curve when you consider the two major corrections that the markets experienced in the 2000's.

CNR doesn't particularly shine in the area of dividend yield. The company has a dividend yield of only 1.59% as of this writing which is rather low for the liking of many dividend oriented investors. However, there is a clear policy of rewarding shareholders with increasing dividends every year. The most recent one was an increase of 25.2% from 0.25 to 0.313 per share and just like clock work, you know they will increase their dividends every 4 payments.

Here's the dividend history of CNR since inception:

Current dividend per share stands at $0.313 per quarter ($1.252 per share per year).
With a low payout ratio of only 25% (portion of profits used to meet dividend commitments), the current dividend looks pretty much secure and there is plenty of room to keep growing it in upcoming years.

What if instead of buying once and forgetting you decided to contribute with additional purchases every year? What if instead of purchasing $10,000 worth of stock once, you decided to invest $5,000 every year?

Had you invested $5,000 every year in CNR and reinvested all the dividends along the way, your investment would now be worth around $752,292 and you would be the proud owner of around 9550 shares of stock that would be paying you $11,956 every year in the form of dividends. Dividends that are favorably taxed in respect with normal income a.k.a salary. Dividends that provide you with cash flow without selling your shares, without giving away your ownership on the company.

So, what is not to like about this company?

Because it is a solid, stable and proven business, savvy investors are always chasing and bidding up this stock. The only thing I don't like about CNR is that it is a bit overpriced right now, according to its own historical valuations, with PE Ratio, Price to Book and Price to Sales, all above their own 5 year averages. The frustrating part is that this company has been overvalued for quite sometime now, so you feel like you would never get the perfect entry. But, because it is still growing revenues at greater than 10% per year rates, you might not care too much about slightly overpaying today if you want to sell 20 years down the road. Otherwise, waiting for more attractive valuations is preferable.

Disclosure: I do not own Canadian National Railway as of this writing, however I do intend to purchase it in the near future now that it dipped below its 200 Day Moving Average for the first time since late 2012.

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