A CN Rail trains passes through a train yard in Vaughan, Ont., on June 20, 2022.Nathan Denette/The Canadian Press
Quick, which Canadian industry would you guess has been the best stock market performer over the past 30 years?
The big banks, you say? Afraid not. Big oil? Utilities? Technology? No, no and not even close.
For the past three decades, the TSX has consistently been dominated by a business that revolves around just two companies moving stuff on a pair of parallel steel rails.
The Canadian railway duopoly, consisting of Canadian National Railway Co. CNR-T and Canadian Pacific Kansas City Ltd. CP-T, sports a mighty average annual return of 15.5 per cent, which is best in class by a decent margin, according to a CIBC World Markets report released last month.
An investment of $1,000 parked in those two stocks would have turned into more than $75,000 over that 30-year period. The same investment in the big banks, the next best performer, would have netted just $37,000 over the same time.
That track record at least raises the argument that every Canadian investor should own shares in one of the two railways, if not both.
While past returns do not guarantee future results, the railways have proven capable of thriving across all manner of economic and geopolitical conditions.
“These are two of the best infrastructure assets in the world,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management. “People should probably own fewer banks and more rails, and just leave them in your portfolio forever.”
On Tuesday, CN reported fourth-quarter results that capped off an unusually challenging year for the business of railroading. Forest fires, floods and a strike by B.C. port workers all presented operational setbacks. Plus, demand for goods waned as consumption habits shifted back to services – part of a normalization of the economy from the distortions of the COVID-19 pandemic.
“We came into the fourth quarter a little battle-hardened after a couple of difficult quarters last year, where we managed through a freight recession and a number of external shocks,” Tracy Robinson, CN’s chief executive, said on a call with analysts.
The company seems poised to return to form, with management telling investors to expect growth in earnings per share of 10 per cent to 15 per cent annually over the next few years.
CP, meanwhile, is due to update investors when it releases fourth-quarter results next week. Analysts are expecting it, too, to return to double-digit earnings growth this year.
Both companies are managed on the principles of “precision railroading,” pioneered by legendary CEO Hunter Harrison, who ran both railways over his career. This lean model of scheduling and asset utilization is a big reason the railways have become such investor darlings.
Now consider some of the other virtues that investors prize the most – competitive advantages, for example. The rail network is part of the fabric of the Canadian economy, linking vast and rugged terrain.
“There are no realistic, long-term, cost-competitive alternatives to shipping goods and commodities by rail, and there are no new railway networks being built,” the CIBC report says.
It’s the mother of all barriers to entry.
The North American railway business was also once a highly fragmented and barely investible sector, shunned by the likes of Berkshire Hathaway CEO Warren Buffett. But years of consolidation changed the industry’s profile, such that even he bought in. By 2010, Berkshire owned Burlington Northern Santa Fe Corp. in its entirety.
“We are a major and essential part of the American economy’s circulatory system,” Mr. Buffett wrote in the company’s 2010 annual report.
All around the world, institutional investors are scrambling to get their hands on infrastructure assets for their stable long-term returns. For Mr. Schwartz, the Canadian railway stocks give regular investors a way to tap into the same movement.
“Here’s your chance to own a piece of forever infrastructure, and you don’t have to pay some schmuck a management fee,” he said.