Dividend Aristocrats

Canadian National Railway Stock, a 24 Year Dividend Aristocrat

Even though Canadian National Railway Stock is not a member of the S&P 500 Dividend Aristocrats index in the United States, it is a member of the Canadian Dividend Aristocrats group having paid and raised dividends for 24 consecutive years.

None the less, at this pace, Canadian National Railway Stock is on pace to join the prestigious S&P 500 Dividend Aristocrats group since its stock trades both on the Toronto Stock Exchange and New York Stock Exchange.

Canadian Dividend Aristocrats are stocks that have raised dividends for at least 5 years, trade on the Toronto Stock Exchange and have a minimum market capitalization.

Management last raised its quarterly dividend by 7% to CAD $0.5750 in January 2020. This is up from CAD $0.5375 in December 2019.

In this article, we review CN Railway Stock’s latest financial results and business operations, dividend growth history, growth outlook, valuation and long term performance versus the broader Canadian Stock Market as measured by the Toronto Stock Exchange (TSX).

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Canadian National Railway is a backbone of the Canadian economy with 20,000 route miles of track connecting 3 important coasts: the Atlantic, Pacific and the Gulf of Mexico. The company’s moat is its long railway tracks and connections to  other railroads that provide customers access to Canada, the US and Mexico.

Transporting over 300 million tons of cargo equivalent to $250 billion worth of goods annually, CN Rail serves a diverse array of customers from manufacturers, farmers, retailers, importers and exporters.

Freight revenues for the company are generated across 7 commodity groups. They are:

  1. Petroleum and Chemicals
  2. Metals and Minerals
  3. Forest products
  4. Coal
  5. Grain and fertilizers
  6. Intermodal
  7. Automotives

No one commodity accounts for more than 25% of total revenues making CN Rail a less cyclical stock that fluctuates up and down with the boom and bust cycle of commodities’ related businesses.

During the great oil crash of 2015 and early 2016, CN Rail Stock dropped 24% from peak to trough. This is because the company is levered to transporting commodities such as oil and petrochemicals.

Attached screenshot shows how Crude Oil Shipments in Carloads dropped from 98,000 in 2015 to 52,000 in 2016. It has currently recovered back to levels seen since 2015 transporting 99,000 carloads in 2019.

The picture also shows crude oil shipments in barrels per day. From 162,000 barrels per day in 2015, shipments were almost cut in half in 2016 to 85,000 barrels per day. They have since caught up in 2019, transporting 159,000 barrels per day.

CN Rail Crude Oil Shipments

Revenue Analysis and Share Buybacks

For full year 2019, Canadian National Railway generated CAD $14.917 billion in revenues earning an operating income of $5.593 billion, implying a solid 37.5% operating margin. Revenues grew 4% year over year from 2018’s total of $13 billion.

Over the last decade, CN Rail has grown its US Dollar revenues from $8.342 billion in 2010 to $11.488 billion in 2019. This represents a healthy compounded annual growth rate (CAGR) of 3.25%.

Trading on both the New York Stock Exchange and the Toronto market, CN Rail has a market capitalization of CAD $88.01 billion and pays a 1.9% dividend yield. This yield is 80 basis points lower than the yield provided by the TSX 60 index which is 2.7%.

Largest segment is also the strongest; intermodal which generated $3.787 billion in revenues in 2019, a 9% year over year growth. Management attributes this growth to the successful acquisition of TransX, one of the oldest transportation companies in Canada.

CN Railway Revenue Breakdown 2019

Other reasons for growth in intermodal business include higher freight rates and higher volume seen in Port of Prince Rupert shipping internationally.

Over the last 5 years, CN Rail has rewarded shareholders with $14 billion in dividend increases and share buybacks.

The company increased its dividend by 18% in 2019 and has a 16% dividend compound annual growth rate (CAGR) over the last 5 years. Share buybacks total $9.3 billion over the last 5 years while dividends paid equal $5.5 billion.

CN Rail Stock Share Buybacks and Dividend Growth

In terms of revenue growth, CN Rail has managed to grow its top line revenues as measured by Ton Miles. The company has achieved a 2% compounded annual growth rate (CAGR) in revenue ton miles (RTM) over 5 years. RTM measures how much revenue a railroad generates per volume of freight transported.

In simple terms, it measures revenue earned for transporting one ton of freight across one mile. CN Rail achieved a 5% growth in revenue ton miles from 237.1 billion revenue ton miles to 248.4 in 2018.

It out performed its peers such as CP Rail, CSX and Norfolk Southern who have grown revenue ton miles by 3% year over year.

CN Rail Stock EPS Growth

 

 

 

 

 


Growth Outlook

In its 4th Quarter, 2019 earnings results, CN Rail reported revenues of $3.584 billion, a 6% decrease year over year due to an 8 day labour strike as well as weak freight demand. Diluted earnings per share came in at $1.22, a 22% decrease year over year due to higher capital expenditures of $7.4 billion in 2018 and 2019.

JJ Ruest, President and CEO quotes, “We remain focused on executing our strategy of long-term sustainable growth at low incremental cost. Our strategic deployment of technology, the next step in our Precision Scheduled Railroading model and our next driver of value, is well underway.

At the same time, we continue to closely monitor the freight volume environment and rightsize our resources and costs to demand.”

He adds, “Over the past two years, CN invested C$7.4 billion in capital expenditures to increase capacity, efficiency and resiliency of the network. In 2020, our capital program will decrease to C$3.0 billion, generating higher free cash flow. CN’s strong balance sheet provides us with the financial flexibility and resiliency required in the current turbulent economic environment.”

CN Rail 2020 Guidance

For 2020, management has issued guidance of mid single-digits for adjusted earnings per share growth which would add to the $5.90 generated for full year 2019. Thanks to lower capital expenditures, management expects a higher free cash flow of $3.3 billion for 2020, compared to $2 billion in 2019.

Measuring the Dividend Payout Ratio

Lets calculate the the dividend payout ratio for CN Rail Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2019 4th Quarter Earnings, the company states free cash flows of $1.992 billion for the year. Total dividends paid in the year equal $1.544 billion. What is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $1.544 / $1.992

Dividend Payout Ratio = 78%

A dividend payout ratio of 78% is quite high and investors should usually scrutinize this a little bit more. But in the case of CN Rail, we know the company spend record amounts of money in 2018 and 2019 in capital expenditures, thus lowering its free cash flow.

However, management has guided for a higher free cash flow in 2020 up to $3.3 billion. Using this number and assuming the dividend grows by another 7%, expected dividend payout ratio in 2020 will be:

Dividend Payout Ratio = ($1.544 billion x 7% more) / $3.3 billion

Payout Ratio in 2020 = 50%

A dividend payout ratio of 50% is more justified in this case, and gives management plenty of room to buy back stock as well continue its impressive double-digit dividend growth rate.

Dividend Growth History

Canadian National Railway paid its first quarterly dividend in 1996. Since then, the company has grown its dividend from just 5.7 cents a share in 1997 to $2.15 per share in 2019. This represents a compounded annual growth rate (CAGR) of 17.1% over 23 years, which is truly a fabulous growth rate.

Attached chart shows year over year % growth in dividend payments for CN Rail. In most years, the company has managed low double-digit growth whereas between 2005 to 2007, the company grew its dividend at close to 30% annually and 50% in 1998.

What is even more impressive is during the great financial crisis of 2008, the company still grew its dividend in mid to high single digits.

Valuation

Thanks to a strong dividend growth rate over the past 23 years, competitive moat and economic resilience, investors are paying up to own shares of CN Rail.

The stock currently trades at 20 times forward 2020 earnings estimates, which is higher than both the TSX and the S&P 500 which trades at 19 times forward earnings.

As a comparison, its competitors such as CSX trade for 19 times forward earnings while Norfolk Southern trades for 18.7 times 2020 earnings.

Ownership by Bill Gates

As a testament to the company’s huge competitive moat around its business, Bill Gates is one of the largest shareholders in the company with the Bill & Melinda Gates foundation owning over $1.6 billion worth of stock.

Bill Gates just like Warren Buffett, invests in businesses that cannot be easily duplicated. If anyone wants to copy CN Rail, they would have to invest 10’s of billions of dollars to build a huge railroad track across North America; something that is not easily achievable.

Executive Summary

Here is what we like and don’t like about Canadian National Railway (CNR) Stock.

Likes

  • Huge competitive moat around its railroad business; no competitor can easily set up shop and eat its lunch.
  • One of the best operating ratios in the industry.
  • Strong management and 24 year history of consistent growing dividend payments.
  • Decent 1.9% dividend yield.
  • Rewarding shareholders with a 16% compounded annual growth rate (CAGR) in its dividend over the last 5 years.
  • $2 billion share buybacks in each of last 3 years, and a total $9.3 billion in share repurchases over 5 years.

Dislikes

  • Prone to commodity boom and bust cycles, labour strikes, protests which shut down railcars, etc.
  • Vulnerable to the next economic downturn. If oil prices drop, # of railroad cars transporting crude oil will plummet which will hit earnings.
Market Capitalization $88 Billion
Dividend Yield 1.9%
Forward PE Ratio 20 times Forward Earnings
Dividend Growth (5 Year Avg.) 16%
Dividend Payout Ratio (2020 Est.) 50%
EPS Growth (5 Year Avg.) 8.7%
2019 Revenues $14.917 Billion
Gross Margin 74%
Net Margin 34.3%

CN Rail Stock Ex-Dividend Dates

Ex-Date Record Date Pay Date Declared Date Type Amount
03/09/2020 03/10/2020 03/31/2020 01/28/2020 Normal 0.575
12/06/2019 12/09/2019 12/30/2019 10/22/2019 Normal 0.5375
09/06/2019 09/09/2019 09/30/2019 07/23/2019 Normal 0.5375
06/06/2019 06/07/2019 06/28/2019 04/29/2019 Normal 0.5375
03/07/2019 03/08/2019 03/29/2019 01/29/2019 Normal 0.5375
12/06/2018 12/07/2018 12/28/2018 10/23/2018 Normal 0.455
09/06/2018 09/07/2018 09/28/2018 07/24/2018 Normal 0.455
06/07/2018 06/08/2018 06/29/2018 04/23/2018 Normal 0.455
03/07/2018 03/08/2018 03/29/2018 01/23/2018 Normal 0.455
12/07/2017 12/08/2017 12/29/2017 10/24/2017 Normal 0.4125
09/07/2017 09/08/2017 09/29/2017 09/01/2017 Normal 0.4125
06/07/2017 06/09/2017 06/30/2017 04/25/2017 Normal 0.4125
03/08/2017 03/10/2017 03/31/2017 01/24/2017 Normal 0.4125

CN Rail Stock Price

To see most recent price for CN Rail Stock, go to the company’s Investor Relations website and click on “Stock Information.”

 

 

 

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