Railroad stocks such as Canadian National Railway (TSX:CNR) and Canadian Pacific Kansas City (TSX:CP) have generated massive wealth for long-term shareholders. If we adjust for dividend reinvestments, Canadian National Railway has returned 1,380% to shareholders since September 2004, easily outpacing the TSX index gains of 403%. Comparatively, Canadian Pacific Kansas City stock has returned more than 2,000% in this period.
However, as past returns shouldn't matter much to current and future shareholders, let's see which Canadian railroad stock is a better buy right now.
The bull case for Canadian National Railway stock
Valued at $98.5 billion by market cap, Canadian National Railway transports several products, such as petroleum, chemicals, grains, fertilizers, coal, metals, and minerals, as it serves exporters, retailers, farmers, and manufacturers, with a network of 19,500 route miles of track spanning Canada and the United States. Basically, Canadian National Railway is a TSX giant that enjoys a wide competitive moat.
Canadian National is a global transportation leader and trade enabler. It is essential to the North American economy, safely transporting 300 million tons of natural resources, manufactured products, and finished goods throughout the continent each year. The TSX heavyweight aims to create value for customers and shareholders by enhancing customer engagement and leveraging the strength of its expansive rail network.
With $52.7 billion in assets, Canadian National Railway reported sales of $16.8 billion in 2023. Moreover, it invested $3.1 billion in capital expenditures and reported a free cash flow of $3.9 billion.
Despite a challenging macro environment, Canadian National Railway increased its adjusted earnings per share by 5% year over year in the second quarter (Q2) of 2024. Moreover, earnings growth is expected in the mid- to high single-digit range this year.
Canadian National Railway's free cash flow has risen from $2.05 billion in 2019 to $3.77 billion in 2023. In the last 12 months, its free cash flow has totalled $3.57 billion, while the company has spent less than $2 billion to pay shareholders a dividend, indicating a payout ratio of less than 60%.
Analysts remain bullish on CNR stock and expect it to surge over 15% in the next 12 months.
The bull case for Canadian Pacific Kansas City stock
Valued at $105 billion by market cap, Canadian Pacific Kansas City operates over 20,000 route miles spanning three countries. Since 2011, the company has improved average train speed by 41%, while the average train weight and average train length have increased by 53% and 42%, respectively.
Canadian Pacific Kansas City's precision railroading operating model and disciplined focus on execution have allowed it to better utilize its assets and deliver cash flow across market cycles.
In Q2 of 2024, Canadian Pacific increased its sales by 14% year over year to $3.6 billion. It ended the June quarter with a healthy operating ratio of 64%, while adjusted earnings per share rose by 27% to $1.05. Comparatively, its operating expenses rose by just 5% year over year to $2.33 billion in Q2.
Priced at 26 times forward earnings, CP stock is not too expensive, given analysts forecast earnings to grow by 13% annually in the next five years.
The Foolish takeaway
Both Canadian National Railway and Canadian Pacific Kansas City are quality blue-chip companies that continue to grow their earnings and cash flow. Investors should consider gaining exposure to the two railroad leaders and benefit from consistent returns in the upcoming decade.