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Canadian National Railway’s CNI efforts to reward its shareholders through dividends and buybacks are encouraging. However, high operating costs and low liquidity are major concerns.
Factors Favoring CNI
As a reflection of its shareholder-friendly stance, CNI paid dividends of C$2 billion, C$2.07 billion and C$2.14 billion in 2022, 2023 and 2024, respectively. The railroad operator is also active on the buyback front. The company repurchased shares worth C$4.71 billion, C$4.55 billion and C$2.6 billion in 2022, 2023 and 2024, respectively.
Concurrent with the fourth quarter of 2024 earnings release, CNI’s board of directors approved a dividend hike of 5% in its quarterly cash dividend, effective from the first quarter of 2025. This is the 29th consecutive year of dividend increases. Additionally, CNI’s board has also approved a new Normal Course Issuer Bid, which allows it to purchase for cancelation over a 12-month period up to 20 million common shares, beginning from Feb. 4, 2025, and ending no later than Feb. 3, 2026.
Signaling an improvement in the freight scenario, freight revenues (C$16.39 billion), accounting for 96.2% of the top line, increased 1% year over year in 2024. Freight revenues in petroleum and chemicals, and grain and fertilizers rose 7% and 5% year over year, respectively.
From a valuation perspective, CNI is trading at a discount compared with the Zacks Transportation-Rail industry, going by the forward 12-month price-to-earnings ratio.
Image Source: Zacks Investment Research
Key Risks for CNI
Rail network issues due to headwinds like locomotive or crew/labor shortages and other service disruptions represent a major challenge for CNI. Network issues or supply-chain constraints are likely to adversely impact service levels, in turn hurting operating efficiency or volume of shipments.
Rising operating costs can be seen from the fact that operating expenses rose 5.5% from the year-ago figure. This increase was mainly due to higher labor and fringe benefit expenses and a rise in purchased services and material costs.
CNI's liquidity position is a concern. At the end of 2024, CNI’s current ratio (a measure of liquidity) was only 0.66. A current ratio of less than 1 is not desirable as it indicates that the company is at financial risk. It might not be able to easily pay down the short-term obligations.
CNI’s Zacks Rank
CNI currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Investors interested in the Zacks Transportation sector may consider Ryanair Holdings RYAAY and Expeditors International of Washington EXPD.