Strong Fundamentals with Canadian Pacific Railway

Canadian 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 has easy access to international markets with its large 13,000 miles of rail network, more than 100 transload facilities across Canada and the U.S. and linkages to key ports on the east and west coast.

CP Rail operates the shortest and fastest routes in key lanes across Canada and the U.S. Its transcontinental service provides the fastest service between Eastern Canada, Calgary, and Vancouver.

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 43% of Canadian Pacific’s 2020 freight revenue followed by Merchandise Goods (36%) and Intermodal (21%).

With decades of experience, Canadian Pacific has established long-standing relations with Class 1 and short-line railroads. By geography, global business (Asia and Europe) accounted for ~37% of 2019 freight revenues, while cross-border and domestic comprised 32% and 31%, respectively.

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Key Investment Data

 

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Revenue Growth & Market Exposure

Canadian Pacific Railway provides critical services to a highly diversified customer base by moving goods and commodities reliably and efficiently. The company moves 85% of Canadian export metallurgical coal, and ships 70% of potash moving in North America.

It has sufficient room for future growth given its ability to increase the train length, network, terminal capacity expansion, and surplus land and locomotives availability. Customers prefer rail-based transportation as it is the safest, cost-effective, and environmentally friendly means to ship. Canadian Pacific is trusted by reputed names like Shell, ExxonMobil, Honda, Suncor, Loblaws, Home Depot, Cenovus, Cargill, etc.

The company has a sound track record of strong performance in the domestic intermodal and is revamping its product offering in the international intermodal. 

Canadian Pacific is in a good position to leverage its leading market share in the Canadian railroad industry and take advantage of Canada’s growing trade industry. Canadian Pacific should benefit from the strong fundamentals for grain, potash, and coal.

Positive news around U.S. trade settlements and talks with China should encourage commodity exports. On the merchandise front, CP continues to drive success through its impeccable service, strong utilization of its assets and transloads network. The company’s transload strategy is poised to succeed given its unique terminal capacity and land for low-cost expansion. 

Canadian Pacific has strengthened its network with the acquisition of Central Maine and Quebec Railway in 2020 getting access to Northeastern U.S. and Atlantic Canada. It also completed the acquisition of the 83.5% ownership of the Detroit River Tunnel Partnership and announced plans to build and operate a leading transload and distribution facility along with Maersk in Vancouver. Canadian Pacific reported good performance in the last year driven by improving efficiencies, reduced casualty, and lower fuel price.

The company recorded a speed of 22 mph as compared to 22.2 mph in 2019 and a 1% decline in locomotive productivity. However, trains’ length improved by 7% and Canadian Pacific recorded strong safety performance in 2020. The company has a strong pipeline of unique opportunities entering into 2021.

Dividends

Canadian Pacific has grown its dividend by more than 12% CAGR over the last decade and last raised it by 14.5%. It has increased its dividend for five consecutive years to become a dividend aristocrat and has an average annual yield of 0.84% currently.

A low payout ratio of 21% provides plenty of room for future dividend growth. Canadian Pacific returned over $2 billion to shareholders in 2020 and $6.8 billion during 2016-20. Its earnings have also grown at a rate of 18% CAGR over the last decade. The company is targeting a 25%-30% dividend payout ratio over the long term.

The railroad is a highly capital intensive business constantly requiring upgrades to networks and railroads and large investment in capacity expansion. Canadian Pacific is also investing in network upgrades. Its strong pipeline of high return projects should support dividend growth in the future.

A highly diversified customer and industry base provides and competitive access to key markets in Canada and the U.S. give it the much needed immunity from industry fluctuations and help in achieving safe and secure cash flows. 

CP’s cost discipline has enabled a strong free cash flow generation. A disciplined approach to capital investments and the strong returns should continue to drive margin improvement. Canadian Pacific has successfully achieved a 13% increase in the average train weight and 10% increase in the average train length over the last five years leading to better asset utilization and reduced costs.

Its investments in locomotive modernization and hopper car acquisitions is expected to drive capital spending in the near-term. The company is targeting high-single-digit RTM growth and high single to double-digit EPS growth for 2021.

Canadian Pacific (CP) historical yield
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Competition

Canadian Pacific suffers competition from other railways, motor carriers, ship and barge operators, and pipelines. Canadian National Railway and BNSF Railway Company are its primary competitors, operating in Canadian Pacifics’ major territories.

With extensive years of experience under its belt, Canadian Pacific Railway has gained the reputation of a global transportation solution provider. The company operates in a highly regulated environment which acts as a significant entry barrier for any newcomer.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:CNRCNRCanadian National RailwayIndustrialsRailroads67.61134.1595.2223.8023.805.531.830041.800042.4613.540067Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:CPCPCanadian Pacific RailwayIndustrialsRailroads58.7189.7660.5618.5818.583.760.850015.600040.7613.750055Tollbooth - UnregulatedNONOYESNOCanada1

Bottom Line

CP Rail should comfortably continue its dividend growth streak in the future. It is uniquely positioned to leverage its low-cost base and best in class service to grow with its customers. As a leading railroad transporter, Canadian Pacific should benefit from increasing crop production in North America and rising global grain demand, normalizing refined fuel markets.

Canadian Pacific has enough room to grow its footprint given its large number of locomotives, huge yard and terminal capacity, growing network capacity and surplus land. 

CP vs TSX vs SP500
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Canadian Pacific (CP) historical pe
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