Centuries Old, Centuries Strong

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It was 1753 when England sent over the first steam engine to their colonies in North America. Some years after that Cornelius Vanderbilt, The Commodore, took a large sum of his money and invested it in the railroad industry, and the United States hasn’t been the same since.

Rail is still one of the primary methods of transportation, particularly for natural resources. Companies like Cliffs Natural Resources, an iron ore mining company, own their own lines. The majority of the lines are left to the big players, though. In the United States there is Union Pacific (NYSE: UNP), CSX Corporation (NYSE: CSX) and Berkshire Hathaway’s (NYSE: BRK-A) Burlington North Santa Fe. Canada also has two major rail companies that any serious investor should take a look at: Canadian National Railway Company (NYSE: CNI) and Canadian Pacific Railway (NYSE: CP).

How Do They Stack Up?

All five of these railroads are huge, they span across their respective nations and earn great revenues shipping oil, coal, and other resources around the nation. In terms of just the railroads, though, there isn’t much more room for growth, but there also is likely to be no slippage either.

People will always need things shipped, and unless we all drill for our own oil in the backyard, the railroads will be used to get it to us. It would take a serious switch in the way that things are done for these railroads to start failing.

In terms of size and locations of these companies, Union Pacific and Burlington North share the western part of the United States. Both of these companies operate around 32,000 miles of track that span from Illinois to the Pacific. CSX operates just outside of these boundaries with their 21,000+ miles of track up and down the east coast. Both Canadian companies operate throughout their country and some parts of the United States. Canadian National’s 20,000 miles of track manages to come all the way down to Baton Rouge, Louisiana.

Dividends Would Be Great!

Railroad dividends would be great. You could, after all, just invest in an MLP and rake in the cash from their pipelines, so why not find a railroad that pays too?

Four of these companies pay dividends, the one exception being Berkshire Hathaway--but we’ll come back to them later.

The yields of the four that actually pay dividends aren’t too shabby. CSX Corporation offers investors the most bang for their buck with a 2.54% yield; in second place is Union Pacific with a 2.06% yield; Canadian National has a 1.84% yield; and Canadian Pacific rounds out the pack with a yield of 1.25%.

If you are looking for yield then you’d probably want a company that continues to increase its dividend, and all four of these companies have been increasing their dividends substantially over a five year average. At the top of the pack for increases is Union Pacific, averaging 26.88% over the last five years. Last in the increases category of the four that pay dividends is Canadian Pacific, who still averages an incredible 9.96%.

What’s Up With Berkshire?

You’ve no doubt heard of Warren Buffett and Berkshire Hathaway.  The company is incredibly diversified, brings about incredible growth, and will likely continue to do so for some time. This stock is in a league of its own when compared to the rest of the rail companies. Berkshire’s main division is insurance and reinsurance through firms such as GEICO. They don’t stop there, though, and have stakes in some of America’s greatest companies such as Coca-Cola, American Express, and Wells Fargo.

This company doesn’t need to pay a dividend, as they’re distinctly different from the rail companies in so many ways, and you should factor that into your final verdict on the railways.

Rank ‘em

I’d have to put Berkshire Hathaway in the number one spot simply because of diversity. This company is engaged in rail in a big way, but it’s also engaged in so many other fields that rail could vanish of the face of the earth tomorrow and you wouldn’t be left penniless. The stock has a four star CAPS rating, five stars if you’re a regular Joe like myself who can’t muster up the $140,000+ per share for the ‘A’ stock. The P/E at Berkshire is hovering around 18--not too overpriced for one of the most stable companies there is.

Union Pacific would be my second choice and my number one for a pure rail play. The company carries a five star CAPS rating, a great yield and dividend growth, and it also has the best EPS growth numbers of the remaining companies. Three year EPS growth is at 25.67% and the five year is at 16.91%. The P/E ratio of the company is around the 16.8 mark at the time of writing, less than the 20 that I usually look for.

Third place is a tie between Canadian National and CSX Corp. Both companies have a five star CAPS rating and show positive growth over the last year, three years, and five years. The both also have positive revenue growth over the same time periods. CSX presents perhaps the better buying opportunity, though with a much lower P/E ratio of 12.11, whereas Canadian National sits at 16.6.

In last place we’re left with Canadian Pacific. Even though this stock has a four star CAPS rating I’d definitely stay away and opt for one of the other rail companies. Canadian Pacific is the only pure rail play of the group that’s showing negative EPS growth, something long-term investors shouldn’t take too kindly to.


Ash1402 has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus