CN is earning more and raising its dividends

Blue chip stock Canadian National Railway earned a little more last year and will earn more this year and next. It will continue to raise its dividends. The railroad greatly improved its operating ratio. It remains a buy for share price gains as well as decent and growing dividends.

Montreal-based Key stock Canadian National Railway Company (TSX—CNR), or CN, earned more in 2016. It’s expected to earn more this year and next. This ‘dividend aristocrat’ has raised its dividend again. It also bought back its own shares. The railroad remains a buy for long-term share price gains as well as decent and growing dividends.

CN’s earnings per share rose a little

In 2016, CN earned an adjusted $3.581 billion, or $4.59 a share. This was up by only 3.4 per cent from an adjusted $3.580 billion, or $4.44 a share, the year before. The weaker loonie added an extra $85 million, or 11 cents a share, to the railroad’s earnings.

Despite flat total earnings, CN’s earnings per share rose. That’s because it spent a net $492 million to buy back 25.2 million shares. Spreading the same earnings over fewer shares automatically increases the earnings per share, of course.

On a more positive note, CN improved its operating ratio. Its revenue slipped by 4.6 per cent, to $12.037 billion. The railroad’s carloadings declined by 5.1 per cent, to 5.205 million. This largely reflected lower volumes of crude oil, coal and frac sand.

CN’s operating costs fell by a steeper 8.4 per cent, to $6.725 billion. This was largely due to lower fuel costs, labor and fringe benefits as well as lower purchased services and material. As president and chief executive officer Luc Jobin puts it: “We saw weaker volumes during the year, but quickly adjusted.”

It costs CN less to earn a dollar of revenue

Operating costs of $6.725 billion divided by revenue of $12.037 billion results in an operating ratio of 55.9 per cent. That’s 2.3 percentage points lower than last year. In other words, it cost CN only 55.9 cents to generate a dollar of revenue. The year before, it cost 58.2 cents.

Better earnings and expected earnings growth this year and next led CN to raise its dividend. Its dividend is up by 10 per cent, to $1.65 a share. This ‘dividend aristocrat’ has increased its dividend for 22 years in a row. Executive vice-president and chief financial officer Ghislain Houle said “our resilience . . . supports our long-running ability to reward shareholders with consistent dividend growth”.

Mr. Jobin is upbeat about CN. He said: “Overall, the economy remains challenging, but we remain optimistic and expect to see moderate volume growth in 2017.” The railroad plans to invest $2.5 billion this year. This should improve its efficiency.

CN expects its 2017 earning per share to rise “in the mid-single-digit range”. Its earnings are expected to increase by 8.1 per cent, to $4.96 a share. After all, it’s better to under-promise and over-deliver than the opposite. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio of 18.2 times.

CN’s multiple is set to improve

Next year, CN’s earnings growth is expected to accelerate by 9.5 per cent. Based on this estimate, the shares trade at a better P/E ratio of 16.7 times. One longer-term risk is a potential unraveling of supply chains in North America. Less trade could hurt the earnings growth of railroads. Then again, one longer-term opportunity is rising shipments of oil. It’ll take years to build pipelines such as Keystone XL or Energy East. Meanwhile, production growth will go by rail.

 

This is an edited version of an article that was originally published for subscribers in the February 10, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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