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Buy CP for capital gains and rising dividends

Canadian Pacific Railway earned record results in the first nine months of 2014. As trade with Asia and traffic grows, so should its earnings. This will give the railroad the means to invest as well as raise your dividends and buy back its shares. CP remains a buy for further long-term share price gains and rising dividends.

In the nine months to September 30, CP earned a record $1.025 billion, or $5.84 a share. This was up by nearly 30 per cent from $703 million, or $4.50 a share, a year earlier. Revenue growth greatly exceeded the growth of the costs.

Earnings per share rose more than total earnings. That’s because the railroad spent $987 million to buy back 5.3 million of its shares in the first nine months. This greatly exceeded the issuance of 0.9 million shares for $50 million. Buybacks raise earnings per share as the earnings are spread over fewer shares. Higher earnings per share can raise the share price.

CP’s record revenue outpaced its costs

In the first nine months, CP’s total revenue climbed by 7.9 per cent, to a record $4.860 billion. The number of car loadings was 1,994,000. This was down by only 0.4 per cent from 2,002,000 car loadings a year earlier. Car loadings increased for Canadian grain, crude oil, domestic intermodal, metals and minerals as well as consumer products. Car loadings decreased for U.S. grain, coal, potash, fertilizers and sulfur, forest products, chemicals and plastics, automotive and international intermodal.

CP’s total freight revenue per carload stood at $2,380. This was up by eight per cent from $2,214 per carload a year earlier. Freight revenue went up in all categories except for Canadian grain, automotive and domestic intermodal.

In the same period, CP’s total operating costs inched up by only 0.3 per cent, to $3.229 billion. Only the price of fuel and materials went up. Costs that went down include compensation and benefits, equipment rents, depreciation and amortization as well as purchased services and other.

With revenue rising much more than costs, CP’s profits rose, of course. More important, in the third quarter CP’s operating (operating costs to revenue) ratio improved to 62.8 per cent. That was a record low (lower ratios are better). It was down 3.1 percentage points. Chief executive officer Hunter Harrison wants to do even better. He says that CP is “focusing on further efficiency and capacity initiatives and building on our solid foundation for growth.”

In the first nine months, CP’s cash flow rose by 12.5 per cent, to $1.568 billion. This surpassed net capital spending of $674 million and dividend payments of $184 million. The railroad used excess cash flow to repay debt of $175 million and buy back its own shares.

In 2014, CP is expected to earn $8.45 a share. That’s a jump of nearly 32 per cent from earnings of $6.42 a share last year. In 2015, the railroad’s earnings are expected to jump by over 31 per cent, to $11.10 a share. Based on this estimate, CP’s shares trade at a forward price-to-earnings ratio of about 20 times. That’s high but justified, since the growth in CP’s earnings per share is much higher.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846