MOOSE MARKETS

INVESTING THE CANADIAN WAY

Best Canadian Stocks

Buy List Stock for May 2024: Telus (T.TO / TU)

A buy list stock of mine since March 2023, Telus is still in my top five Canadian picks for growth. As future growth in the wireless industry is limited, Telus has diversified its business to find new growth vectors. The company is acting wisely in the face of the current headwinds by reducing its capital expenditures (CAPEX) and increasing its cash from operations. It hasn’t received a lot of love from the market in the last two years, and likely won’t in 2024, but I believe that will change eventually; in the meantime, investors enjoy consistent mid-single-digit dividend increases every year.

Invest with conviction. No more doubts or paralysis. Register for our upcoming May 30th webinar, or listen to the replay.

Telus Business Model

TELUS Corporation is a Canada-based telecommunications company. The Company provides a wide range of technology solutions, including mobile and fixed voice and data telecommunications services and products, healthcare software and technology solutions, and digitally led customer experiences.

Data services include internet protocol, television, hosting, managed information technology and cloud-based services, software, data management and data analytics-driven smart-food chain technologies, and home and business security. It operates through two segments.

  • The technology solutions segment includes network revenues and equipment sales arising from mobile technologies, data revenues, some healthcare software and technology solutions, voice, and other telecommunications services revenues.
  • The International segment is comprised of digital customer experience and digital-enablement transformation solutions, including artificial intelligence (AI) and content management solutions.

Build yourself a recession-proof portfolio! Learn how in our free workbook. Download it now!

Telus Investment Thesis       

Telus logoTelus has grown its revenues, earnings, and dividend payouts very consistently. Very strong in the wireless industry, the company is now tackling other growth vectors such as internet and television services. Telus has the best customer service in the wireless industry as shown by its low customer loss rate. It uses its core business to cross-sell its wireline services. The company is particularly strong in Western Canada. Telus is well-positioned to surf the 5G technology tailwind.

Finally, Telus looks to original and profitable ways to diversify its business. Telus Health, Telus Agriculture, and Telus International (tech & games, finance, eCommerce, and artificial intelligence) (TIXT.TO) are small, but emerging divisions that should lead to more growth going forward. In 2022, Telus acquired Lifeworks for $2.3B to boost its health business segment.

In 2023, CAPEX slowed down ($2.6B) and was mostly financed by free cash flow ($2B). This explains why the company keeps its generous dividend growth streak alive. For 2024, the company expects lower CAPEX and stronger operating cash flow. We like that mix!

Want to see what our U.S. buy list stock if this month? See it here.

Telus Last Quarter and Recent Activities

Starting in 2023, the macroeconomic landscape has made it a challenging time for the telecommunications industry and Telus is no exception—years of fueling growth through cheap debt ended with rising interest rates.

Telus recently reported lackluster results for Q1’24. Consolidated revenue was down 0.6% and adjusted EPS was down 3.7% compared to Q1’23. Revenue for wireless/wireline revenue was up 0.4%, but down in for Telus Health (-0.7%), Agriculture (-0.24%), and International (-.98%).

Cash flow from operations of $950M increased 25% from Q1’23, but free cash flow was down 26% to $396M, due in part to interest charges going up to $394M from $320M.

Telus is keeping its CAPEX stable, a wise move during this difficult time. It reaffirmed its 2024 full-year guidance that it will have sufficient cash flow to pay dividends.

Invest with conviction. No more doubts or paralysis. Register for our upcoming May 30th, webinar, or listen to the replay,  here.

Potential Risks for Telus

Competition is increasing among the Big 3 in the wireless market; Rogers and Shaw merged, and a new player is arriving on the scene, with Quebecor acquiring Freedom Mobile. Margins could be under pressure in the future. Also, the federal government wants more competition for the “Big 3” and is likely to open the door to new competitors down the road.

As the wireless market becomes fully mature, Telus will need other growth vectors. TV & internet won’t be enough to prevent Telus from becoming another Verizon (VZ) ten years from now. We’re not convinced by the acquisition of Lifeworks, specifically its cost. We will see how Telus integrates the business into its Health division.

Finally, Telus’ debt has increased substantially, from $12B in 2015 to $27B in 2024. Higher rates might affect future profitability, especially if they persist. Everyone expects tate cuts in 2024, but so far, the Bank of Canada keeps delaying them due to inflation. The headwinds facing the company explain its stock performance as of late.

Graphs showing evolution of the Telus (T.TO) stock price, revenue, EPS and dividends over the last 5 years. Telus is our buy list stock for May 2024.

Telus Dividend Growth Perspective

This Canadian Aristocrat is by far the industry’s best dividend payer. Telus has a high cash payout ratio as it puts more cash into investments and capital expenditures. Capital expenditures are regularly taking away significant amounts of cash due to their massive investment in broadband infrastructure and network enhancement.

Such investments are crucial in this business, and, for a good while, Telus filled the cash flow gap with financing. At the same time, Telus continued to increase its dividend twice a year, exhibiting strong confidence from management. In 2023, Telus increased its dividend twice for a total increase of 7% for the year.

However, with the higher cost of debt and other macroeconomic challenges, Telus has wisely reduced its capital expenditures. This decision has already helped increase its operating cash flow, contributing to the dividend’s safety. Investors can still expect the dividend to increase, but I suspect the dividend growth will slow down in 2025 while the company faces the current headwinds and because of its lower free cash flow.

Build yourself a recession-proof portfolio! Learn how in our free workbook. Download it now!

Final Thoughts on this Buy List Stock

The story for Telus in 2024 is about three important metrics: cash from operations, capital expenditure (CAPEX), and free cash flow. I want to see the first one go up, the second one go down, and the last one to cover the dividend payments. I have Telus in my portfolio. Over the next few quarters, I will keep an eye on these metrics.

Right now, Telus is struggling a bit and not performing as well as I’d like. I still see a lot of potential in its diversified business areas, Telus Health, Telus Agriculture, and Telus International. These should eventually generate growth for the company. For a patient investor who’s in it for the long haul, Telus could be a great opportunity and that’s why it’s a buy list stock of mine.

 

Buy List Stock for April 2024: Hammond Power Solutions (HPS.A.TO)

New to my buy list for April 2024 is Hammond Power Solutions (HPS.A.TO). This pick is a speculative play. While Hammond Power is a small-cap company it might be the underdog investors didn’t see coming. It’s an interesting play with a good dividend if one is not afraid of market fluctuations. Hammond is still experiencing significant growth.

See also our U.S. buy list stock pick for this month.

Get great stock ideas from our Rock Stars list.

Hammond Power Solutions Business Model

Hammond Power Solutions Inc. is a manufacturer of dry-type transformers in North America. It engineers and manufactures a range of standard and custom transformers that are exported in electrical equipment and systems. It enables electrification through its range of dry-type transformers, power quality products, and related magnetics. Its standard and custom-designed products are essential and ubiquitous in electrical distribution networks through a range of end-user applications.

The company’s products include power transformers, furnace transformers, converter transformers, unitized substations, control & automation products, low voltage distribution products, medium voltage distribution products, and others. It supports industries, such as oil and gas, mining, steel, waste and water treatment, commercial construction, data centers, and wind power generation. It has manufacturing plants in Canada, the United States, Mexico, and India and sells its products around the globe.

HPS.A.TO Investment Thesis 

Hammond Power is a small-cap company with a market cap of approximately $950M that competes against many giants in the industrial field. The company enjoys a solid reputation for the quality and reliability of its. HPS tried to expand its Hammond Power Solutions logosuccess internationally but had to close its Italian division and continues to struggle in India. However, after closing its Italian business, the company focused on what’s working for it in North America.

The company is now well-positioned in Mexico and exhibits growth potential in both Mexico and the U.S., which now represent more than 50% of its total revenue. Hammond continues to witness significant growth in its custom business in the energy, mining, silica chip manufacturing, and data center markets.

HPS.A.TO Last Quarter and Recent Activities

Hammond Power Solutions 2023 results showed robust growth across all geographies and channels. Its most recent quarterly results were strong, again, with revenue up 30% and EPS up 10%. The quarter ended with record shipments of $187M globally. This was a new record top line, which helped the company reach its margin and profit targets.

U.S. and Mexico sales were helped by a stronger U.S. dollar relative to the Canadian dollar compared to 2022.  HPS saw substantial sales growth in the OEM channel in the U.S. in support of data centers, warehousing, industrial manufacturing, mining, electric vehicle charging, renewable energy, and oil and gas production. The company will continue to invest in increasing its capacity for 2025. This is looking good!

Graphs showing Hammond Power Solutions (HPS.A.TO)'s stock price, revenue, EPS, and dividend over 10 years
Monster growth for Hammond Power Solutions (HPS.A.TO)

Potential Risks for Hammond Power Solutions

The pandemic had an impact on HPS as revenues decreased due to the deferment of electrical projects, business interruptions, and overall lower levels of economic activity. However, HPS proved its resilient business model, with orders rebounding and HPS skyrocketing.

We advise you to tread carefully with small caps that are growing too quickly. HPS’ expansion success in North America couldn’t be replicated in India or Italy. After closing its business in Italy, future expansion projects may not spark investors’ enthusiasm. Also, a part of the company’s revenue is tied to the oil & gas and mining industries, both of which are highly cyclical. HPS is also subject to currency fluctuations due to its exposure to the U.S. and Mexican markets. With such a small capitalization, an investment in this company can fluctuate frequently.

Want more ideas? Get our Rock Stars list, updated monthly.

HPS.A.TO Dividend Growth Perspective

HPS finally resumed its dividend growth policy in 2022 with a generous increase. The dividend went from $0.085/share to $0.10/share (+17.6% increase!) and then to $0.125 (+25%!) in early 2023. However, remember that the company chose to cut its distribution following the financial crisis of 2009, with more cuts in 2011-2012. The dividend remained stable for several years before the recent increases.

Unfortunately, the dividend growth policy will follow industrial economic cycles. In the meantime, you can enjoy the ride! Speaking of which, management increased HPS’s dividend by another 20% in September 2023.

Final Thoughts on Hammond Power Solutions (HPS.A.TO)

Hammond Power Solutions has shown amazing growth for the last two years. With a recession possibly around the corner, its customers in cyclical industries might not do very well themselves. Is HPS resilient enough to keep that growth going or will headwinds slow it down? Only time will tell.

Obviously, you don’t bet the house on this, but it could be a very lucrative investment, as long as you can live with significant volatility.

 

Buy List Stock for March 2024: Capital Power Corp. (CPX.TO)

Our buy list stock for March 2024 is Capital Power Corp. (CPX.TO). This is an educated guess. The company is almost perfect, showing a strong business model and good metrics. However, it might come with price fluctuations because of the risks surrounding debt for such a capital-intensive business in the current landscape of high interest rates.

Want to see our U.S. buy list stock of the month? Click here.

Capital Power Business Model

Capital Power Corp. is a growth-oriented power producer company. It develops, acquires, owns, and runs renewable and thermal power generation facilities and manages its related electricity and natural gas portfolios. It runs electrical generation facilities in Canada and the United States. The Company has approximately 9,300 megawatts (MW) of power generation capacity at 32 facilities across North America.

Its projects under construction include over 140 MW of renewable generation capacity and 512 MW of incremental natural gas combined cycle capacity from the repowering of Genesee 1 and 2 in Alberta. It has over 350 MW of natural gas and battery energy storage systems in Ontario and approximately 70 MW of solar capacity in North Carolina in advanced development. Its La Paloma facility is in Kern County, California. The Company also has a natural gas generation facility in the Harquahala region of Arizona.

Don’t miss anything! Subscribe to our free newsletter here!

CPX.TO Investment Thesis    

Capital Power has invested heavily in new projects each year since 2012. This has enabled it to grow its AFFO consistently. Contrary to Algonquin Power (AQN), CPX currently shows funds from operation per share growth year after year despite higher interest rates.

After announcing the acquisition of Midland Cogeneration (a 1,633 MW natural gas combined-cycle cogen facility), it did it again in late 2023, acquiring a 50.15% interest in the 265 megawatts (MW) Frederickson 1 Generating Station in Pierce County, Washington. This will bring CPX’s revenue diversification to 50% U.S. and 50% Canada.

The acquisitions add another 1,608 MW of net capacity to CPX’s U.S. WECC portfolio, boosting run-rate U.S. EBITDA to ~40% of total contributions. Acquisitions are expected to bring an 8% AFFO growth per share. CPX is now the 5th largest natural gas IPP in North America.

We like CPX’s strategy of investing in renewable energy and its goal to abandon coal in 2024 and show zero net production by 2045, but profitability might be hard to achieve with these projects in this market. 22% of adjusted EBITDA was generated from renewable assets in 2021. An investor can expect continued profitability going forward as CPX keeps investing in renewables.

Graphs showing Capital Power Corp.'s stock price, revenue, EPS, and dividend payments over 10 years. Sollid growth
CPX.TO: accelerating revenue and earnings growth, steady dividend growth

CPX.TO Last Quarter and Recent Activities

In 2023, Capital Power continued to transform its Genesee generating station to move away from coal. It completed the work needed for Unit 3, now 100% natural gas-fuelled, and progressed the repowering of Units 1 and 2, with completion expected in 2024. CPX made its largest transaction ever with the acquisition of the La Paloma and Harquahala natural gas facilities, as well as the addition of the Frederickson 1 facility.

Capital Power reported a good quarter with revenue growth of 6% and funds from operation per share up 15%. AFFO increased due to lower overall sustaining capital expenditures resulting from fewer outage activities, and higher adjusted EBITDA.

Potential Risks for Capital Power Corp. 

For several years, Capital Power’s had too much of its revenue coming from Alberta making it dependent on the state of the province’s economy.  Through its multiple acquisitions, CPX brought its exposure to this province down to 31%.

As with all other utilities, CPX.TO is a capital-intensive business. It must invest heavily continually to generate more cash flow. The market might not be so eager to see additional debt to fund projects in the coming years. With higher interest rates, debt could become a burden. There’s no guarantee that liquidity will continue to be easy to get from capital markets. While CPX shows a healthier balance sheet than Algonquin, let’s not forget how aggressive growth by acquisition strategies can end when they’re not managed properly. Finally, weather variation could affect results as we’ve seen already, where warm winters reduce AFFO occasionally.

Don’t miss anything! Subscribe to our free newsletter here!

CPX.TO Dividend Growth Perspective

Considering its various wind energy projects and the robust Alberta economy, CPX’s management expects to increase its dividend by 6% through 2025. Such a promise is always welcomed by income-seeking investors.  Through its successful transformation into a diversified utility, CPX is earning its place among other robust Canadian utilities such as Fortis, Emera, and the Brookfield family.

Final Thoughts on Capital Power (CPX.TO)

CPX.TO intends to invest heavily in the wind energy business and to get many U.S. projects. Its diversification plan is paying off; it reduced Alberta’s contribution to its revenue to less than one-third and has managed to show sustained growth. The company now expects a dividend growth rate of 6% through 2025.

With its vigorous growth by acquisition strategy, Capital Power could face headwinds from high interest rates on significant debt. Investors aware of these potential risks and willing to live with them while the investment thesis stands might find it an attractive play.

 

Buy List Stock – December 2023: Brookfield Corporation (BN.TO)

Still number one buy list stock on the Canadian market for December is Brookfield Corporation (BN.TO / BN). The engine behind the Brookfield family of businesses, BN is a core holding, one that investors can hold for a long time. Have a look.

You can have a look at my buy list stock pick of the month on the U.S. market.

BN.TO Business Model

Brookfield Corporation is an alternative asset manager, meaning that its assets are not liquid like conventional assets such as stocks, bonds, cash, ETFs. It owns and operates these real assets with a focus on compounding capital over the long term to earn attractive total returns for its shareholders. Managing alternative assets requires a high level of expertise and patience.

Brookfield logo surrounded by 7 boxes naming the company's business categoriesBN is the parent company of the other Brookfield companies; through them BN focuses on long-life, high-quality assets  including: Renewable Power & Transition assets in hydro, wind, solar, distributed energy and sustainable solutions; Infrastructure assets in transport, data, utilities and midstream sector; Asset Management, managing funds coming from pension plans and other investors; Private Equity, businesses that provide essential industrial, infrastructure, and business services; Real Estate with a diversified portfolio across many industries and spread across five continents; Credit, through its majority interest in Oaktree; and Insurance Solutions across the life, annuity, and property and casualty industries.

Investment Thesis for Brookfield Corporation 

The company has access to billions of dollars in liquidity to finance its projects and has built impressive expertise in various industries. BN is present in countries that show potential for high growth for years to come. Its diversified businesses are a solid source of permanent capital. Over the last few years, BN has seen an increase in both the number and size of average client commitments. BN is well-positioned to expand its private fund investor base in Europe and parts of Asia.

Brookfield Corporation doesn’t only do the asset-light manager’s job consisting of strategy and earning fees on assets under management (AUM); it also contributes with its own assets. Therefore, it benefits from its own strategies to recycle its assets; in other words, it can sell assets it considers to be at a high value and reallocate the proceeds into new projects or undervalued assets. It’s the classic “buy low, sell high” concept.

For more great stock ideas, download our Rock Stars list, updated monthly.

BN.TO Last Quarter and Recent Activities

Brookfield Corporation reported decent results for its most recent quarter with revenue increasing 5%, but distributable earnings per share remained flat. Insurance solutions distributable earnings were up 14% as insurance assets increased to ~$50B. The average investment portfolio yield was 5.5%, about 200 basis points higher than the average cost of capital. It continues to track towards reaching $800M of annualized earnings by the end of 2023.

Evolution of Brookfield Corporation revenues over 10 years.
Steady revenue growth for Brookfield Corporation over 10 years.

Operating businesses earnings declined by 8% but funds from operations were supported by a stronger performance from the renewables and infrastructure segments. The asset management segment was up 13% and BN ended the quarter with $120B to invest.

The bigger news about Brookfield of late was its offer to BN shareholders to exchange their shares for shares of Brookfield Reinsurance (BNRE), one for one. There was no share dilution, and the company did it to improve equity base and market capitalization of BNRE.

Potential Risks for BN.TO

BN’s growth depends on investors’ confidence in long-term projects. When panic arises, it becomes difficult for companies like BN to increase their AUM. We had another example of this phenomenon in 2022, when the stock price dropped along with the market.

BN is well-managed and has the ability to navigate the current crisis. Investors must simply remain patient. Its operational complexity can leave many investors wondering how money is managed within the business; it’s easy to get lost in the pile of financial statements throughout the multiple companies and the many stock classes.

Contrary to BAM, which is asset-light, BN’s success relies on management’s ability to manage its assets; in short, making money selling at the right time, and reallocating capital into the right assets at the right time. This adds to the complexity of its business model and requires a larger cash reserve.

Want to find more great stock ideas? Download our Rock Stars list, updated monthly.

BN.TO Dividend Growth Perspective

Following the spin-off of BAM, it’s clear that BN is a low-yield, high-growth stock. The company kept a low yield by paying a $0.07/share dividend. We expect this dividend to increase each year. However, if you’re looking for a more generous yield, BAM is the better option.

Line graph showing BN.TO's dividend payments over 10 years
BN.TO: a low yield high growth stock after Following the spin off of BAM

BN has the advantage of owning a stake in various assets across the Brookfield family, while BAM has the advantage of simply managing the money and earning revenue on a fee charged on the assets under management.

Final Thoughts on Brookfield Corporation

It’s virtually impossible to buy a piece of a bridge or a railroad. This is where Brookfield comes into play as investing in Brookfield Corp is like investing in your own “alternative asset fund”.

As an asset manager, you can expect BN.TO to go through some difficult times with the higher interest rates and possible recession. However, its depth of assets, expertise, and geographic distribution make it a worthwhile buy list stock for investors seeking long-term dividend growth.

Investing in alternative assets is a great way to diversify a portfolio. Usually, the investment returns on such investments are decided by what’s happening on the stock market. You can expect them to generate about 5-7% above inflation over long periods of time. Interest in alternative assets is increasing, especially for institutional investors.

See also the list of Canadian Dividend Aristocrats for other great stock pick ideas.

 

 

 

25 Most Popular Canadian Stocks at DSR

Looking at the 25 most popular Canadian stocks among members of DSR Pro is not only fun, but it can reveal opportunities we might have overlooked. Last week, we covered the top 5. If you missed it, read it here. This article provides the investment thesis for the stocks that are the 6th to 10th most popular, and list those in the 11th to 25th positions along with their respective sectors.

I pulled the most popular stocks from the DSR database based of the number of times they appear across the 2,289 DSR PRO members’ portfolios, not by looking at individual portfolios. This is strictly based on how frequently each stock appears in the database, not on the value invested (which I don’t know).

See also the U.S. stocks most popular with DSR Pro members.

Discover even more great dividend growth stocks. Download our Rock Stars list, updated monthly!

Royal Bank (RY.TO / RY)

6th place – 1165 members

Royal Bank plays a similar role as TD in a portfolio. I prefer RY for its greater diversification. I like its business distribution across classic banking operations (40.4%), wealth management (29.8%), capital markets (18.3%), insurance (7%) and investor & treasury services (4.4%) as per the 2022 annual report. Capital market operations are more volatile and sometimes crash a quarter (we saw this with BMO in 2020). However, it’s also an amazing source of growth. Once again, TD and RY are close in term of assets, popularity, and yield!

Alimentation Couche-Tard (ATD.TO / ANCUF)

7th place – 968 members

You know I love Couche-Tard and it was part of the favorites last year. It’s back to the 7th place after being out of the top 10 last year. Couche-Tard has proven quite resilient over the past few years. The company rewards shareholders with constant growth across all business segments. If you think ATD is expensive today, remember that it’s trading at the same PE ratio it was in 2018. The only difference is that ATD has more than doubled its EPS in the past 5 years.

Brookfield Infrastructure (BIP.UN.TO/BIPC.TO)

8th place – 898 members

I like BIPC for its wide diversification across multiple utility businesses: Utilities (30% of FFO) includes gas pipelines, electricity distribution and transmission lines, and smart meters. Transport (30%) includes railroads, terminals (ports), and toll roads. Midstream (30%) includes transmission pipelines, natural gas storage, and processing plants and polypropylene production capacity. Finally, Data (10%) consists of telecom towers, fiber optic cables and 50+ data centers. Keep in mind BIPC’s a complex business with opaque financial statements. It’s not for everyone.

Discover even more great dividend growth stocks. Download our Rock Stars list, updated monthly!

Brookfield Renewable (BEP.UN.TO/BEPC.TO)

9th place – 866 members

BEPC took a big hit on the market this year, with its stock showing a double-digit decline in 2023 and down over 40% over the past 3 years. You’re probably wondering why you bought it if you focus on short-term returns. I feel your pain. I hold shares too, I’m down 20%, but I don’t mind much though since I intend to hold BEPC for a very long time.  Brookfield is all about “patient capital”.

Scotiabank (BNS.TO / BNS)

10th place – 845 members

I’m still not a fan of BNS. While it offers a juicy yield, it has lagged its peers for over 10 years now. Turns out its exposure to Central and South America hasn’t paid off as anticipated. It’s a source of volatility rather than one of consistently higher profits.

11th to 25th Most Popular

Many of “usual suspects” in this list. I own shares of many of them.

COMPANY NAME TICKER SECTOR
Canadian National Railway CNR.TO / CNI Industrial
National Bank NA.TO Financial services
Emera EMA.TO Utilities
TC Energy TRP.TO / TRP Energy
Canadian National Resources CNQ.TO / CNQ Energy
Algonquin Power AQN.TO / AQN Utilities
CIBC CM.TO / CM Financial services
Granite REIT GRT.UN.TO REIT
BMO BMO.TO / BMO Financial services
Power Corp. POW.TO Financial services
Manulife MFC.TO / MFC Financial services
Magna International MG.TO / MGA Consumer Discretionary
Canadian Tire CTC.A.TO Consumer Discretionary
Suncor SU.TO / SU Energy
Brookfield Corp. BN.TO / BN Financial services

Final Thought

While it’s always fun to feed your curiosity, never let a list like this replace your investment process. It won’t do much good to just pile up others’ ideas in your portfolio without the conviction that they fit with your strategy. I see this list as a good group of stocks to start a research project. But that’s definitely just the beginning. There is a lot more digging required before pulling the trigger…

Buy List – October 2023: Canadian National Railway

My buy list for October 2023 has a new entry: Canadian National Railway (CNR.TO /CNI). I just love buying Canadian National Railway when the market expects a recession!

Railways are incredibly stable because there aren’t any other assets that can replace them in North America. Yet each time transportation volumes go down, the market tends to sell them off. It happened last in 2016, and we highlighted CNR.TO / CNI back then as well. Here we go for another round!

Canadian National Railway logoCanadian National Railway has been known as “best-in-class” for operating ratios for many years. CNR continuously worked on improving its margins and was among the first to do so. Today, peers have caught up and all railways are managed the same way.

CNR’s transportation activities are well diversified across seven different industries. Its exclusive access to the Prince Rupert port is advantageous for intermodal transportation. CNR enjoys a very strong economic moat as railways are virtually impossible to replicate.

Learn strategies for generating income for life. Download our guide now.

CNR.TO Business Model

A transportation and logistics company, Canadian National Railway’s services include rail, intermodal, trucking, and supply chain services. CNR rail services offer equipment, customs brokerage services, transloading and distribution, private car storage, and more.

Cute toy train set with wooden rails, trees, a station, signage and conductorCNR’s intermodal container services help shippers expand their door-to-door market reach with about 23 strategically placed intermodal terminals, with services including temperature-controlled cargo, port partnerships, logistics park, moving grain in containers, custom brokerage, transloading and distribution, and others.

CNR’s trucking services include door-to-door service, import and export dray, interline services, and specialized services. Its supply chain services offer comprehensive services across a range of industries and product types. CNR transports more than 300 million tons of natural resources, manufactured products, and finished goods throughout North America every year.

Investment Thesis       

Canadian National Railway owns unmatched quality railroad assets. With its strong economic moat, we can rely on increasing cash flows each year. There isn’t a more efficient way to transport commodities than by train.

The good thing about CNR is that investors can always wait for a down cycle to buy. Since we see railroads as attractive investments, we usually spot the opportune moment. Considering Q2 2023 results, it seems such a moment is here.

Learn strategies for generating income for life. Download our guide now.

CNR.TO Last Quarter and Recent Activities

With its Q2 results Canadian National Railway sent a strong signal that the economy is slowing down with revenue down 7% and EPS down 8% for the quarter. Revenue decreased mostly because of lower volumes of intermodal, crude oil, U.S. grain exports, and forest products. Volumes shrunk as demand for freight services to move consumer goods lowered and Canadian wildfires caused customer outages.

Rounding up the reasons for the decline were lower ancillary services including container storage, and lower fuel surcharge revenues as fuel prices decreased. CNR updated its full-year outlook, now expects flat to slightly negative year-over-year growth in adjusted EPS.

Potential Risks for CNR.TO

Railroad maintenance is capital intensive and could adversely affect CNR in the future. It’s a difficult balance to obtain an efficient operating ratio and well-maintained railroads. To maintain its network, CNR must make substantial reinvestments continually. However, CNR continues to boast one of the best operating ratios in the industry.

From time to time, CNR’s growth can be negatively affected by its dependence on the Canadian resource markets. When demand for oil, forest, or grain products is low, demand for CNR’s services obviously slows down accordingly. For example, the pandemic caused a slowdown in weekly rail traffic of about 10% over the summer of 2020. As you can see in the graph below, even that didn’t derail (couldn’t resist) CNR’s revenue much or for very long.

Line graph showing CNR's revenue growth over 10 years- steady growth except in 2020-2021 due to the pandemic.

When the oil price is low, trucking steers some business away from railroads. CNR is a captive of its best assets since you can’t move railroads!

Get acquainted with other great Canadian stocks, read Canadian Forever Stock Selection.

CNR Dividend Growth Perspective

Canadian National Railway has successfully increased its dividend yearly since 1996. The management team ensures they use a good portion of CNR’s cash flow to maintain and improve railways, while rewarding shareholders with generous dividend payments. CNR exhibits an impressive dividend record with very low payout ratios. To learn more about payout ratios read this article.

Line graph of Canadian National Railway dividend amount for the last 10 years; yearly increases, with a generous increase early 2022 as business normalized after the peak of the pandemic.

While the business faces headwinds periodically, its dividend payment will not be affected. Shareholders can expect more high single-digit dividend increases. The railroad company kicked off 2023 with an impressive dividend increase of 8%. If you can grab CNR with a yield of approximately 2%, you’re making a good deal!

Learn strategies for generating income for life. Download our guide now.

Final Thoughts on Canadian National Railway

Despite CNR’s capital-intensive requirements and reliance on the Canadian resource markets, we believe Canadian National Railway will come sailing through the current economic downturn and maintain its dividend increases.

With CNR’s unmatched-quality railroad assets almost impossible to replicate, and its management taking on the challenges of the current environment, we could see more growth emerging from all this. Also, CNR will benefit from the cancellation of the Keystone XL pipeline which will drive demand for oil transport via railroads. With a current yield above 2%, CNR is definitely worth a look.