Stock Bought: CNI

Today I bought shares of Canadian National Railway (CNI), a company that operates a major North American railroad network with over 20600 route miles of track for transporting petroleum, coal, chemicals, metals, minerals, grain, fertilizer, forestry products, and automotive products.

I consider CNI to be a good long-term investment because I think railroads will continue to play an important role in fulfilling large-scale, cross-country transportation needs in the U.S. and Canada. Apparently, Bill Gates thinks the same way: He is the largest shareholder of CNI, owning just over 10% of the company (over 46 million shares). No doubt his investment in CNI was influenced by his friend Warren Buffett, whose holding company Berkshire Hathaway bought BNSF Railway for $44 billion in 2010. Interestingly, Buffett previously held sizable positions in two other major railroads, Union Pacific (UNP) and Norfolk Southern (NSC), which he sold to avoid any conflict of interest when BNSF was bought. I currently have a position in NSC (which increased its dividend today) and I think my investment in CNI provides some nice geographic diversification.

CNI is also a good dividend-growth stock. The company has paid uninterrupted dividends since going public and increased its dividend for 16 consecutive years. The 5-year average annual dividend growth rate is 18.0% and today the dividend was increased by 15.4%. With a payout ratio of only 26%, good cash flows, and manageable debt, the dividend appears to be very sustainable.

The stock dipped almost 5% today despite the company reporting great numbers (e.g., record revenues). In terms of valuation, it has a P/E (ttm) of 14.71, P/S (ttm) of 4.06, P/B of 3.05, and PEG of 1.17. In my opinion, these numbers suggest that the stock is fairly valued. The combination of the drop in price and the dividend increase suggested it was a good time to buy.

I bought 20 shares of CNI at the price of $75.00 per share, giving me a 2.00% yield on cost. Although this is the lowest yield of any stock I own, I think it will pay off in the long run due to dividend growth and capital appreciation. At the current dividend rate, I can expect to receive quarterly dividends of $7.50, which would add a total of $30.00 to my annual dividend income. (Note that the exact dividend amount I receive will depend on the Canada-U.S. currency exchange rate at the time of the payment. Moreover, the dividends will be subject to 15% foreign tax withholding, but I can claim that when I file my taxes.)