Monday, November 17, 2008

* Stock Analysis: Canadian National Railway Company (NYSE:CNI) A Value Buy, But Not a Dividend Buy

This article originally appeared on The DIV-Net November 10, 2008.

Linked here is a PDF copy of my detailed analysis of Canadian National Railway Company (NYSE:CNI). Below are some highlights from the above linked analysis:

Company Description: Canadian National Railway Company (CNI) operates Canada's largest railroad, linking customers in Canada, the U.S., and Mexico through approximately 20,400 miles of track.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
CNI is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, CNI is trading at a 11.2% discount. CNI earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
CNI earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1998-2001, 1999-2002, 2000-2003, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. CNI has paid a cash dividend to shareholders every year since 1996 and has increased its dividend payments for 12 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
CNI earned no Stars in this section. The NPV MMA Diff. of the $2,961 is below the $7,500 minimum I look for in a stock that has increased dividends as long as CNI has. If CNI grows its dividend at 15.0% per year, it will take 12 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. The 12 years is more than the 10 years maximum I like to see.

Other: CNI is a member of the International Dividend Achievers™ Index. CNI has a strong balance sheet resulting from stable profitability, cash flow and a diverse customer base. Exercising strict cost controls and efficiency-boosting measures has made CNI is one of the most well-run railroads in North America. Risks include exposure to economic cycles, fuel prices, currency volatility, customer resistance to price increases and labor unrest.

Conclusion: CNI earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks CNI as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to drop to $38.78 for CNI's NPV MMA Differential to be around the $7,500 that I like to see. At that price the stock would yield 2.27%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $7,500 NPV MMA Differential I'm looking for, the calculated rate is 17.3%. This dividend growth rate is above the 15.0% used in this analysis.

From a valuation standpoint, CNI as attractively valued. However, the strengthening U.S. dollar vs. the Canadian dollar has eroded the dividend from $0.2318/share in March 2008 to $0.1933/share in December 2008. Given this, I would only add to my position when the stock is trading below $38.78.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in CNI (2.7% of my Income Portfolio) .

What are your thoughts on CNI?

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