Tuesday, January 24, 2012

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.)


  1. Good stuff. I don't own any railroads yet, but would like to. I'm actually a little surprised you didn't add to your NSC position, as the higher yield and similar valuation (slightly lower valuation?) and lack of foreign withholding taxes makes it the more compelling buy of the two for me, personally.

    NSC is on my watch list. The dividend boost today was very nice!

    Good luck with the new gear to your dividend growth machine. Every little bit counts!

    I've got an itchy trigger finger right now. I haven't made a purchase yet for January due to my recent vehicle purchase. I have some capital just stewing and it's bugging me. I've been waiting for a pullback and there is none in sight. I may make a couple purchases in the next couple days.

    Best wishes!

  2. Hi DM,

    Thanks for your comment. I am looking to add to my NSC position and may do so in the very near future, perhaps even this week. However, I couldn't resist pulling the trigger on CNI on that huge drop today. I've also been watching UNP and would like to add it to my portfolio at some point -- to create a "railroad triumvirate," so to speak -- but I think I'll wait on that. :)

    I've also been bothered by the cash I've had sitting around and I've discovered there's actually a term for it: rhinophobia -- not fear of rhinoceros, but of sitting on cash. For over a month (mid-December to mid-January) I was waiting and waiting for a pullback that never came and I was letting opportunities slip away. I think it's an example of what David Crosetti over at Seeking Alpha calls "stinkin' thinkin'." So I decided to start deploying some cash -- ADM last week, CNI today, likely another stock or two before the end of this week or the month.

    I'll be interested to hear what you end up buying!

  3. You inspired one of my recent buys.


  4. Hi DM,

    Glad to be of inspiration. Congrats on becoming a fellow NSC shareholder!

  5. deedubs,

    I found your blog by following your signature link from Dividend Mantra. Good to meet another dividend investor, now I have another blog to find good information. I have a blog that I never do anything with, but one of these days I am going to get motivated and start blogging (probably when I start living off my dividends and have plenty of free time...lol).

    I like railroads at this juncture in the economy. Plus shipping by rail is going to be more and more economical as oil continues to rise.

    I mentioned over on Mantra's blog I have a little exposure to railroads in Australia with my BIP holding.

    I like your portfolio, many great dividend stocks. Your portfolio is quite a bit larger than mine. I have approximately $26k invested in 6 positions. I also like your yield on cost figures. How long have you been investing in dividend growth stocks?



  6. Hi DPS,

    It's always nice to hear from a fellow dividend investor, which is one of the reasons why I decided to start this blog. I think this sort of thing is a great way to interact and share ideas with other like-minded investors.

    Thanks for your comments on my portfolio. I actually haven't been investing very long. I started in May 2011, but I floundered early on because I hadn't settled on an investing strategy or properly educated myself about the stock market. However, I did a bunch of reading (hence all the book reviews) and by the end of the summer I realized that dividend-growth investing was the best fit for my investment goals and risk tolerance. By the end of 2011 I finished reshaping my portfolio to be 100% in dividend-growth stocks. At that time I also decided to start this blog to keep track of my progress, clarify my thinking, and interact with other dividend-growth investors.

    Thanks for stopping by and best wishes with your investments! Feel free to let me know when you start blogging again.

  7. I think Canadian National Railway is a solid investment.

    Railways naturally have wide moats.

    Good luck on this new blog!

    1. Hi Dividend Monk,

      The wide moat of railways is part of what attracted me to them. CNI is one of the best railways out there, so I think it will do well in the long run.

      Thanks for stopping by my blog. I'm a regular visitor to your blog and I like your detailed stock analyses. Keep up the good work!


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