Best Railway Stocks – 6 Major Railway Companies

The railway system is the backbone of transportation across North America and it’s an oligopoly. It’s doubtful new competitors will surface. From a business perspective, the railway companies control the flow of basic materials and other goods which often dictates where industrial companies will establish themselves in order to get easy access to their goods.

In other words, it’s a toll booth business for the North American economies. When the business is effectively managed, it can generate a profit in good and bad economies. There is some competition or extension of the business but it has limitations. To better understand the effectiveness of the railway in North America, see how the competition stacks up and where it complements it for partnership.

Competitors to Railway Stocks

Airlines vs Railway

The bottom line is really the challenge here. Airlines have to spend money on fuels and fuel prices are only going up. Energy efficient airlines are not really in the short term horizon. On the other hand, railway motor cars are evolving and cost can go down as well as having the ability to better predict shipment arrival.

Trucks vs Railway

Trucks just can’t compete on load alone. The number of drivers needed along with the maintenance requirements would not make this a really cheap alternative. Obviously, the trucking business booms when the railway business grows as you still need a truck to go from the train to the outbound cities.

Pipelines vs Railway

Pipelines can definitely take a bite out of the railway business but they are very expensive to build and requires a lot of approvals. The environmental consideration is huge and the cross country negotiations even bigger. However, it is a definitive competitor as a new pipeline in one of the railway area would drastically affect the amount of oil or natural gas cargo for that railway company.

Cargo Ships vs Railway

No immediate competition since railroads don’t go on water and vice versa but I felt it prudent to surface it as a ship can arrive at ports where your selected railway company does not operate. Both actually can complement each other in moving goods between continents.

Best Railway Stocks

Before we look into the different railway companies, let’s have a look at the railway network. It’s pretty clear that there exists only a handful of players on the west coast where imports/exports are booming.

North America Railway Network
North America Railway Network

Canadian Railway Stocks

Canada only has 2 players in the railway business and both trade on the US stock exchange as well. On a side topic, the railway history across the Rockies is very interesting. There is an old abandoned railway tunnel near the Vancouver area built to compete on the arrival to the west coast. It was deemed too dangerous to keep and it makes for a very nice sightseeing trip.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:CNRCNRCanadian National RailwayIndustrialsRailroads0.57138.6874.6927.4327.435.060.01661.660.454542.300.144175Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:CPCPCanadian Pacific RailwayIndustrialsRailroads0.45396.9653.8023.4623.4616.920.00960.960.224643.800.131953Tollbooth - UnregulatedNONONONOCanada1
TSE:TFIITFIITFI International IncIndustrialsTrucking0.6455.625.1915.7115.713.540.01871.870.293841.040.112476IntermediateNONOYESNOCanada1
TSE:EIFEIFExchange Income FundIndustrialsAirlines0.6333.771.1821.9321.931.540.06756.751.4805122.280.103868Consumable - DiscretionaryNONOYESNOCanada1
TSE:CHRCHRChorus Aviation Inc.IndustrialsAirlines0.162.510.415.635.630.450.00000.000.0000120.000.000000Consumable - DiscretionaryNONONONOCanada1

1. CNR – Canadian National Railway

CNR - Canadian National RailwayCanadian National Railway is a leading transportation and logistics company in North America. The company owns the only transcontinental railway line in North America and provides intermodal, trucking, freight forwarding, warehousing and distribution services. As North America’s leading supply chain player, Canadian National Railway carries more than 300 million tons of cargo annually. It is a fully integrated rail and transportation services company and is the top mover of aluminum, iron ore and base metal ore in North America. Canadian National handles over 50% of all Canadian chemicals production and services the three major petrochemical centers in North America. Its product portfolio is well diversified with intermodal accounting for 25% of revenues, followed by petroleum & chemicals, and grains & fertilizers each at 17%. Forest products, metal, minerals, automotives, etc. constitute the remainder. The company transports goods worth more than $250 billion annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods.

Investment Data

CN will not give you a good dividend yield but you will see consistent dividend growth and very good stock appreciation. CNR is a Canadian Dividend Aristocrats and also a candidate for the 10 – 10 dividend growth rule with 10% dividend growth on average. This is one of the stocks I should have bought early but the low yield kept me at bay.

2. CP – Canadian Pacific Railway

CP - Canadian PacaficCanadian Pacific Railway is a leading Canadian transportation company that moves goods and commodities from Montreal to Vancouver in Canada and in the U.S. Midwest and northeast regions. The company also has easy access to international markets, given its large network of 12,500 miles railways, more than 100 transload facilities across Canada and the U.S. and linkages to key ports in the east and west coast. Canadian Pacific is known for its reliable and efficient movement and delivery of critical goods to a diversified group of customers in the automotive, food products, energy, industrial and other key markets. It is the only Class 1 railway with significant grain franchises in both Canada and the US. Bulk goods comprised 41% of Canadian Pacific’s 2018 freight revenue followed by Merchandise Goods (37%) and Intermodal (22%). With decades of experience, Canadian Pacific has established long-standing relations with Class 1 and short-line railroads.

Investment Data

Canadian Pacific Railway TSE:CP is recovering from a major change in management. Their efficiency just wasn’t there and it wasn’t comparable to CNR. However, their new boss is the previous CNR CEO and he should be able to bring efficiency back. You may wish to be patient and wait for the efficiency or still to CNR.

From a numbers perspective, the growth seems to be very similar. That’s one reason why I like the railway sector. It’s an oligopoly with a wide moat. However, the P/E is a ticking bomb compared with CNR. If the changes by the CEO were to take longer, CP could see a drop in price to a more natural valuation.

U.S. Railway Stocks

From my research, there are 4 major players in the US. I am not as familiar with all the US railway companies and their details but I am positioning them based on their ability to profit from the self-sufficient oil producing goals and their ability to deliver that oil to refineries. Interestingly enough, none of the US railways are part of the  S&P500 dividend aristocrats.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:UNPUNPUnion Pacific Corp.IndustrialsRailroads0.62199.80135.6324.8224.828.050.01941.940.482043.880.160886Tollbooth - UnregulatedYESYESNONOUSA1
NASDAQ:CSXCSXCSX IndustrialsRailroads0.6079.8361.0721.4621.463.720.01301.300.279641.040.100986Tollbooth - UnregulatedYESYESNONOUSA1
NYSE:NSCNSCNorfolk SouthernIndustrialsRailroads0.52221.0356.3927.5427.548.030.01701.700.468243.760.118563Tollbooth - UnregulatedNONONONOUSA1
NYSE:LUVLUVSouthwest Airlines CompanyIndustrialsAirlines0.3839.8323.4999.6399.630.400.00000.000.000040.000.231360Consumable - DiscretionaryNONONONOUSA1
NYSE:KSUKSUKansas City SouthernIndustrialsRailroads0.35182.8417.2531.3231.325.840.00880.880.274041.600.047633Tollbooth - UnregulatedNONONONOUSA1
NASDAQ:AALAALAmerican Airlines Group Inc.IndustrialsAirlines0.3013.196.710.000.00-8.170.03033.031.000040.400.030322Consumable - DiscretionaryNONONONOUSA1

 1. UNP – Union Pacific Corporation

I listened to a really good segment on Cramer’s Mad Money about Union Pacific NYSE:UNP Corp.  and the CEO of Union Pacific Corporation was interviewed. The major points were that UNP is well positioned to benefit from the American oil boom as well as the Mexican car manufacturing. It has a large network between central and western US and derives its revenue from multiple sources (6 total). UNP is a dividend grower but far from targeting being a dividend aristocrat since it kept its dividend flat between 2004 – 2006.

Investment Data

2. CSX – CSX Corporation

CSX NASDAQ:CSX is also located on the east coast competing directly with NSC. It makes for a competitive market for the east coast and definitely allows for the other players to negotiate their rates with them. With the size of both NSC and CSX, there definitely appears to be room for 2 major players but in the end, UNP and KSU are positioned to own their area respectively. Growth might have to come from other sectors such as trucking or freight and acquisitions. The P/E reflects that it isn’t priced for growth at the moment, unlike KSU.

Investment Data

 3. KSU – Kansas City Southern

Kansas City Southern NYSE:KSU is established in the central united states with routes flowing in and out of Mexico taking advantage of all the ports in the Gulf of Mexico. It is well positioned to continue to profit from the import of oil as well as the outsourcing of auto manufacturers. With its central positioning, it can bridge the east and west coast together through its partners. KSU is strong on the east coast with some central locations. When you look at the maps between UNP and KSU, they each have exclusive usage of separate but complementary sectors. If the two were to merge, they would cover the entire country. KSU also has a well-diversified transport spread across 7 sectors. They are mostly raw materials with the exception of automotive.

Investment Data

 4. NSC – Norfolk Southern Corp.

While UNP pretty much owns the west coast in terms of tracks, Norfolk Southern Corp. NYSE:NSC covers the east coast though. Since a lot of the major centers are located on the east coast, it’s fair to say that NSC is well positioned to continue to serve those centers. However, as manufacturing moves to cheaper locations so does the transfer of natural resources which can cause a reduction of natural resources transport.

Investment Data

Final Thoughts

The first aspect of owning a railroad company is to understand where they operate and where their revenue is coming from to assess if they can benefit from economic changes. At the root though, it’s one of the best methods of transportations and will continue to be so for many years.

North American Railway Map
North American Railway Map

It’s clear that the past 10 years, the railway companies have grown tremendously. They are not cheap stock to DRIP as you need are really large amount. If you want yield right now, NSC and CSX are your holdings of choice, however, CNR and CP are consistent dividend growers and their yield is only low because of the continuous stock appreciation.

Key points of research for me are:

  • Railway Network – the west coast and central locations are very important for the coming years
  • Efficiency – Are they operating effectively
  • Growth Consistency – With a relatively low yield, there needs to be growth.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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