The Canadian Investor - CP vs. CNR: Which Canadian Railway Is the Better Investment?

Episode Date: June 16, 2025

In this episode, we break down Canada’s two freight rail titans—CN Rail and CP Rail—and compare them across operations, financials, capital allocation, and strategy. We look at how CNR’s east-west network stacks up against CP’s newly integrated Canada–US–Mexico line following the Kansas City Southern acquisition. We also compare each company’s and discuss the bullish and bearish case for each. Tickers of stocks discussed: CP.TO, CNR.TO  Questrade’s new securities lending program Get your TSX Meetup tickets here! Get your Calgary Meetup Tickets here! Check out our portfolio by going to Jointci.com Our Website Our New Youtube Channel! Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

It's the small things that make us Canadian. At BMO ETFs, all of our tickers start with Z. That's right, Z, not Z. From ZSP to ZEB, we know how to build solutions for the Canadian investor. So the next time you invest in ETFs, consider AZ instead. Visit BMOETFets.com for more. Investing is simple, but don't confuse that with thinking it's easy. A stock is not just a ticker. At the end of the day, you have to remember that it's a business.

Just my reminder to people who own safe Google's, don't be surprised when there's a cycle. If there's uncertainty in the markets, there's going to be some great opportunities for investors. This has to be one of the biggest quarters I've seen from this company in quite some time. Welcome back to the Canadian Investor Podcast. I'm back with Dan Kent. We have a fun episode planned today. I'd like to take the credit but credit is due to you

Dan will be comparing the two Railways that we have in Canada that for those of you are not aware they do actually go in the US as well Different areas of the US but they they expand their very expansive networks They're probably two of the largest railways Like that's it largest well ways in North America, right? Yeah, yeah. They span a very long range, especially now that CP bought Kansas City Southern. They have very wide networks and I can't remember, I think we went over one of the earnings reports and then I kind of thought it'd be a good idea to kind of put the two railways together and compare them because they are very different,

especially after the acquisition. Like they're different railways. In Canada they have, you know, most of the same network, but you know, south of the border. They're different and similar at the same time. Yeah, exactly. Depending on what you're looking at. Yeah, exactly. You do get exposure to a lot of different routes with both airlines, or sorry not airlines,

railways. So yeah, it should be a good episode. Yeah, I think so. I think it'll be fun just for people to get a better sense here of what they look like. They're big railways. We obviously talk about them quite a bit. Just for context, I think you own CP, right, if I remember correctly? Yeah, I used to own CNR

And then I believe I sold CNR probably a year or a year and a half ago and bought CP Yeah, there you go. And I own neither although CP is definitely on my radar used to own Canadian National Rail and You'll probably hear a few rents about me about some of the decisions I've been taken and what we'll do is I'll mostly talk about Canadian National Rail you'll mostly do CP we'll go back and forth we'll try to compare them as best as we can kind of similar metrics might be a bit different at times but we'll do our best and maybe sometimes I'll chime in for CP and vice versa for Dan so for those who are

listening if you like the format let us know we can try looking at that Maybe do that once a month or something like that where we take two businesses and compare them, whether it could be two Canadian businesses like we are looking at right now, but it could be like a Canadian and US equivalent business and just look at it. We recently did the earnings of Dollarama. So that could be an idea, right? You compare Dalarama to some of its US peers because there's not really any comparables in Canada. So those are the kind of things that we could do if that's something that's interesting. I know a lot of people like when we do kind of deeper dives. So that's kind of a medium dive in each company, I would say. Yeah.

Yeah. It'd be a bit difficult to go over both deep dive in one episode, but yeah, it should be kind of a good cross comparison because like like we mentioned, they're very similar, but they've had very different strategies over the last over the last while one has worked out fairly well and one is kind of hasn't worked out all that well, but we'll get into that later. Yeah, exactly. So I'll start with CNR, just an overview here and I'll be showing for both, I'll show an overview of the network here for Joint TCI listeners. And actually before we get started on those, just some housekeeping items, just a reminder, we have our Calgary event coming up on July 8th and our Toronto TSX event coming up on July 24th.

The registration links are in the show notes. We are also for Joint TCI, we have added a premium RSS podcast feed that you can add to your favorite podcast player, although Spotify is not supported there. So we are adding some more things for members, we'll likely increase the price for the membership towards the end of the summer. I haven't decided on the date yet but for those who are already members they will not see that price increase so it's now is the time for the nine dollars a month if you want to log that in. And the last thing is we are also going to start having some YouTube clips so just clips from this episode for example.

So if you want to see us and you're not subscribing to Joint TCI, that's fine. You can go on YouTube and you'll have a clip of the episode. So usually it'll be a segment that you can see our beautiful faces and not to worry. Dan's eyes may be a bit red just because he has really bad allergies and you know there's also some fires happening that are not helping him out. So that's about it. So we'll start here. I was going to show a map like I was mentioning before. Oh there you go. And for whatever yeah if whatever reason I guess those geo google maps weren't really working. So first of all Canadian National Rail about 25,000

employee. The CEO is Tracy Robinson. She's been in place since February of 2022. For some additional context, she became CEO after Jean-Jacques Ruet retired following the failed attempt by Canadian National Rail to try and purchase Kansas City Southern, which eventually got purchased by CP. And again, he retired, but it was kind of clear that there were some shareholders that were very unhappy with the bid because they knew that it would never get approved in the US from a regulatory perspective. Their network is just absolutely massive.

Same thing for CP as we'll be showing on the other maps. It spans from east to west in Canada, goes up north especially more up north. It does go up north for Quebec, Ontario, but especially Alberta. It goes way up north here and all the way up to northwest territories. And then in the U.S. it does go there as well. So it goes all the way from kind of the I would say best way to explain it from the Great Lakes all the way to the Gulf of America but I'll just still say Gulf of Mexico because Trump changed the name yeah I wasn't sure and it actually says on the map Gulf of America which I don't know I've always for me it's like an automatic it's Gulf of Mexico but anyways so I ran to, very extensive rail network.

Even if you look at the map and you see the other networks in the US, you'll clearly see that the one from CNR is very expensive. So that's an overview of their kind of their business, bird's eye view, and also the network. And then I'll let you go over CP now. Yeah, so I think on the visual here, CN is the red. Yeah, and then I believe CP is like the copperish

looking color. Yeah, it's very hard because it's like kind of overlaid. So that's why, yeah. So I didn't specify CNR is the red. It's the most visible one. Yeah, and CP will be like that copper ish color and now the blue obviously now that they have Kansas City Southern and I think Where I think the main reason the see the CNR acquisition failed is they already kind of had a railway

Going down that corridor and it whereas CP really didn't So they were able to kind of make that acquisition whereas CNR had some difficulty but CP 20,000 employees they have a little fewer employees but they they also have a larger market cap now post acquisition Keith Creel has been the CEO since 2017 and after the acquisition CP rail owns the only single line railway that connects Canada the US and Mexico. You can kind of say that, you know,

the bulk of CN is kind of East West, whereas now, you know, after this acquisition, I mean, CP has a lot of North South capability there. And yeah, is it? Go ahead. No, no, yeah, I was gonna say it's very expansive network as well. Yeah, it's, I mean, gigantic.

So prior to the acquisition, CNR was the bigger railway, but after the acquisition, they're pretty similar in size. And yeah, that acquisition kind of materially shifted CP. It was huge. I think it was a $41 billion acquisition. And yeah, they definitely got a different look for now. Yeah for sure I mean it's yeah they're two like pretty impressive always in terms of network and maybe in terms of before we get into the

financial metrics and maybe it's good to talk about the competition here we didn't have exactly in that order but in terms of competition and risk I think some will overlap for both. So for Canadian National Rail, obviously they are competing with CP on many routes. Like they are competing with them on a lot of routes. They also have competition from the trucking industry. Like Alain Bedard said, the CEO of TFI International a few months ago, the trucking industry is definitely in a freight recession right now. So I would not be surprised if they're trying to put some pricing, you know, some better

deal on pricing to try and retain some of that business, which could put some pressure on the railways whenever like it's an option, whether using trucking or railways. But the reality if you're thinking about railways, both businesses have massive moats. I mean, it would require, I've said this before on the podcast talking about CPN's Canadian National Rail, it would require massive investments just for a new entrance to build that same kind of network,

just on a sheer money basis. Just think about the billions of dollars that would be required but then like we reference for Canadian national rails fail bid to buy Kansas city southern you also need regulatory approval and we've seen with in Canada with pipelines also in the US you need regulatory approval not only on the federal level in Canada and the US but you also need it on the provincial and state level and that's not always easy to get sometimes a lot of you know when Canada provinces will disagree on whether they see the value in a an infrastructure project or not and even for you know in terms of rail still I know you added some comments. I mixed up the notes, yeah.

Yeah, you mixed up the notes. So that's kind of my big note, my kind of big takeaway here. Do you want to add a few things? I think I'll make a bit more sense here. Yeah, so I just kind of want to mention that, like, even if you think about the motes, like even for a standard flat railroad track, you're talking about like millions of dollars to build it. So, I mean, once you once you factor in the actual locomotives, you know, tracks running through bridges, cities,

like even if it's not, you know, a basic slap of flat track on a on a piece of land, especially the land, I mean. Well, well, yeah, I keep in mind, too, like you'll probably have to do some use some explosive to get through. Oh, yeah, I keep in mind too like you'll probably have to do some Use some explosive to get through. Oh, yeah areas like just the sheer amount. Yeah, it's just crazy if borderline just guy Impossible. Oh, I mean nobody's gonna replicate the network So now the the thing is I mean when you think about the most like a lot of people say, you know You should buy companies with strong modes I mean the market in terms of valuation the market knows this I mean, it's not it's very well known that you know, you should buy companies with strong moats. I mean, the market in terms of valuation, the market knows this.

I mean, it's not it's very well known that, you know, these networks are. I would I would argue impossible to replicate. I mean, nobody is going to lay out that amount of cash to try and compete with this, which is why, you know, in terms of growth of network in the railway space, it's often through acquisition. And there's also like very few acquisitions because there's so few players in the space. Rail again, just continues to be a dominant method of shipping. 40% of the country's overall freight.

I can't remember if this is in the US or just North America in general, but I mean, railway is still like the number one way, especially when we think of like commodities and stuff like that. I mean, you're not really going to truck a lot of that stuff. It's mostly going to be moved by freight. And another interesting comment is back when Buffett acquired BNSF railway, he had mentioned that it was not an investment for a decade or two down the line.

Like he said, you know, this railway will will still be around in 100 or 200 years because it's just, you can't really think of another logical way to move things across the country, you know, outside of a you know, a large railway. Especially, again, trucking is so inefficient, depending on what you're shipping, that I just, I don't think they'll ever be replaced. No, exactly. And I mean, that is the other thing, thing right they have stood the test of time. Yeah.

So I think that is one type of business and it's not a bank that's been operating for a hundred years I mean it's basically hard assets. Yeah. So no it's I mean it's there's something to like about these kind of businesses they're they're boring they're not gonna be doing amazing returns. They're probably gonna be doing similar to the market, maybe slightly outperforming the market, but they should be relatively stable in most environment. Of course, they're gonna suffer a little bit if there's a downturn with the economy, obviously, because then you lower demand for a lot of the goods that are transported there, but at the end of the day they should be pretty resilient long term.

In this kind of market, I like having some cash on the sidelines. It gives me the flexibility to jump on opportunities when the right stock goes on sale. But just because the cash is waiting, it doesn't mean it shouldn't be working for me. That's why I use EQBank. They offer some of the best interest rate among Canadian banks, so my money's still earning while I wait. You can even get a boosted rate by setting up direct deposit for your payroll and depositing $2,000 or more per month into your EQBank account. Your cash stays liquid and ready to go when it's time to invest. And if you're not in a rush to access your funds, EQBank's Notas Savings Accounts and GICs

are great ways to grow your returns even more. It's a smarter way to park your cash. Visit EQBank.ca to learn more and keep your money earning even while you wait. As an investor, I'm always looking to reduce my fees, which is why I'm excited that Questrade now offers $0 commissions on stocks and ETFs. But Questrade isn't just about commission-free trading.

You can also get USD accounts, so I avoid forced currency conversion fees when trading US stocks. Plus get access to their advanced edge trading platform available on desktop, web, and mobile. I've been using Questrade for many years and so has Simon. And their platform makes trading seamless whether you're managing a long-term portfolio or making active trades. Don't miss out. Start trading commission free stocks and ETFs today. Visit questrade.com to learn more.

Summer always gets extra busy. Weekends at the lake, trips out to Canada's East Coast, vacations with the family, chasing a bit of sunshine somewhere new. Every time I'm away, and probably you as well, your place just sits at home empty. And since I'm already staying at a great Airbnb, why not have my own place generating a little income on the side while I'm gone? I've always thought it's a great idea, but it made me nervous to think about the work required.

It's easier now with Airbnb's co-host network. I can find a local trusted co-host to handle all of it. Guest check-ins, support, even cleaning, no stress, no extra work. If your place is often empty in the summer, maybe it's time to let it make some income for you. Find a co-host at airbnb.ca forward slash host. If we start switching back here to financial metrics,

the market cap for Canadian national rails is 90 billion. They have an enterprise value of 111 billion EV for those not familiar, you essentially just add the debt or subtract the net cash value. So in this case, if you see the EV that's hired means that they do have net debt on the balance sheet. Instead, if it was 90 billion of market cap but they had 80 billion EV,

then they would have 10 billion worth of cash on the balance sheet. So just for newer listeners, just so they wrap their head around that, it has an average return on invested capital of 11.2% over the last five years, which is not bad for a more industrial type of company like a railway. Pays a dividend that currently yields 2.6%, which is again, not bad for Canadian National Rail. Actually, it's not been very common that they've paid more than a 2% dividend yield so it is on the higher side as far as I can remember

usually when it was above 2% it was pretty rare so it just means that you can probably guess this stock has not performed all that well recently the free cash flow payout ratio has been between 40 and 75%. So that's that is definitely manageable. And if we look here for a joint TCI, you'll see that the free cash flow payout ratio, which is in blue here, has been manageable. It's been if we go back even to 2013, it's always been between like around 40% and 70% roughly, 75%. So on a dividend coverage basis, not a problem. Where it gets a little bit problematic here

is if I don't have the term for it, maybe there is a more technical term, but I ended up just adding the payout ratio for dividend plus buyback. So whatever they pay for dividend and buybacks in a year compared to the free cash flow, and that's where it becomes a bit more problematic for Canadian National Rail, is you see that being upwards of 100% in most years, meaning that they spend more on buybacks and dividend that they create in free cash flow. And that I think is just something I don't like to see. It's one of the main reasons I sold Canadian National Rail not too long ago is just because

I just didn't think that they were doing a great job here. And if you start looking at Canadian National Rail, their net debt, you actually see that, okay, how can they afford to buy back shares plus paying dividend? That's more than the free cash flow. Well, there's only way to, well, there's, yeah. There's only really one way to do it. I was going to say issue shares, but that would defeat the purpose of buying back shares.

So you basically issue more debt. And you can see that since 2021, they haven't really made any like, it's not like they bought a Kansas City Southern or anything like that And their debt has close to doubled since 2021 meaning that they've been using a lot of that debt to actually fuel buybacks Which I don't think it's a good idea. They say that their leverage ratio is manageable they use net debt to EBITDA and

That would be about 2.5%. 2.5 is the ratio that they're looking at. So meaning it takes EBITDA, two and a half years worth of EBITDA to pay back all of the debt. My issue with that is interest expense has increased a whole lot and it's increased 50% since that time frame. So it's increased a whole lot because it's increased 50% since that time frame so it's increased a whole lot because of the increased debt also increased interest rates that have gone up and it just doesn't give the company a lot of maneuvering in case of a recession for example where demand I think it would be a great time for Canadian National Rail to actually reduce that debt you can

keep the dividend just buy back a bit less shares, shore up that balance sheet. So you're in a good position to be able to actually weather any kind of economic downturn. So that's been my biggest gripe with this company is just capital allocation decisions from the management team. I think they they're just too short term focus. I think that is is very very clear. They're too short-term focus and unfortunately a lot of the buybacks they've done was at elevated prices. Yeah. It's easy to say in hindsight but like we were talking before recording I mean it was pretty clear that 2022 was probably kind of a peak year and they were still buying back shares hand over fist. Well, I think they ramped it up in 2010.

Because if you go back to that, I don't know if you can go back to that custom chart you made with the buybacks and the dividends, but like the highest ratio was actually during 2022 and 2023 when prices were, you know. 175% roughly for those two years. So when prices were, you know, 175% roughly for those two years. So when prices were at the highest and if you look at something like CP, which we'll talk about a bit, it was, it was the complete opposite.

I mean, when they, you know, they were buying back shares leading up to, you know, 2021, 2022, and I think the bulk of this would be due to the acquisition. Like, I'm not sure how they would have went, had that not have happened if they would have continued buying back shares, but they kind of stopped and they ended up buying back a ton of shares like pre-pandemic, which are looking at very strong value there, but I can get to that in a bit. CP, you're looking at a market cap of 104 billion. As I mentioned, the company was typically smaller than CN Rail or around the same size, but after that acquisition, they definitely had a big jump

and they have an enterprise value of 126 billion. A big jump of this would be debt issuances, share issuances from the acquisition and return on invested capital sits at 6%. is from the acquisition and return on invested capital sits at 6%. However, the company, you know, like they maintained high returns on invested capital prior to the acquisition, often the 12 to 14% range, very similar to CNRail. Obviously with the huge outlay in capital to acquire Kansas City Southern through debt,

through equity, you know, along with the integration costs over the short term, this will put a drag on that leading up to, you know, up until the synergies are, are fully realized. If they are fully realized, it is looking like they're going to be. They're actually well ahead, but there's also the element that Kansas city Southern's Mexico operations has lower margins than CP's core business overall. And again, like you should see

these numbers recover over the years, but because of that gigantic cash outlay, they're kind of taking a hit. Free cash flow ratio typically hovers around 33%. So they pay out about a third of free cash flow towards a dividend. This is much lower than something like CN Rail. Not much lower, but it is lower, but it's also important to understand, these two companies diverged quite a bit in terms of dividend policy. So CN Rail, I believe they're at 26 years

in terms of dividend growth streak, which again, when you mention the 2% yield, how the company is typically always hovered, I think they're like one and a half to 2%. That kind of just shows you how well the rails have done. Because obviously if you've increased the dividend by that much over a 25 year time period and your yield is still sub 2%,

you know that the share price has done quite well over that timeframe. CPE, they don't really have any sort of dividend strategy whatsoever. They never really have any sort of dividend strategy whatsoever. They never really have. I mean, there would be times pre-pandemic where they would kind of raise the dividend

for two or three years and then stop and then do it again. And then leading up to the Kansas City Southern Acquisition, they kind of halted dividend growth again. Their priority over the last few years, or actually I should say the last decade has definitely been buybacks over dividends. So leading up to that Kansas city Southern acquisition, the company had bought back nearly 25% of its shares outstanding from 2015 to 2021. And I'm not sure if you can pull up this this chart on the on the notes there of the of the buybacks first the

Versus the price but you can see CP rail here Large amount of buybacks leading into 2021 when they made the acquisition and then they effectively stopped Whereas you know a huge a ton of these buybacks were made when the price was I mean some of it You know $32 $40 $50 and now we're it, you know, $32, $40, $50. And now we're sitting at, you know, $95 a share. Whereas if you go down to, if you scroll down a bit to the CN rail one, CN rail really ramped up the buyback activity in 2022 and 2023. When, you know, you could say that shares were, I wouldn't necessarily say they were cheap there. We were in the complete opposite of a freight recession.

We were in a freight boom because of the pandemic, skyrocketing oil, the shipping, just digital shipping from all those lockdowns and stuff. One looks to have made very timely buybacks and not really focused too much on dividend growth, whereas the other one has kind of been really aggressive on the buybacks and the dividend growth over the last while. It hasn't necessarily worked out all that well for CN Rail, while CP has, they've done quite well. It's been a very good

use of capital I would say over the last while. Yeah for CP and definitely and that's the issue with Canadian National Rail CNR is just why wouldn't you give yourself the flexibility that's always what I come back to is pay down that debt pay less on the interest expense and you know what if down the line your debt is like at a pretty very manageable level we don't really enter recession things start picking back up the business just starts booming then you know return money to shareholders increase the dividend pay special dividend buy back some shares combination of all three if you want it's just a long term it's the right move.

And that's what like really annoys me is when I see management team with businesses that are geared towards the long term. This is the type of businesses that span not decades, centuries, yet they're looking at things as if it's only the next one to two three years maximum and that's what I Really do not like about this management team is to me. It's a no-brainer if you're a long-term Manager and honestly long-term shareholders will actually be Benefited way more if you get that balance sheet in order you pay down that debt But clearly that's not what they have in mind.

And obviously the board is on board with it, no pun intended. Yeah. I mean, it's been a relatively poor use of capital, I mean, period over the last while. Whereas, I mean, I wouldn't say CP has like aggressively paid down debt. I think they actually sit relatively flat

over the last few years. I mean, obviously they had that huge jump post acquisition plus a huge amount of share issuances, but it's been relatively steady and I know they did pay off, I'm pretty sure it was nearly a billion dollars in debt over the last while that they had pretty much stated that they're going to prioritize debt repayments over that dividend growth, that share buybacks. stated that they're going to prioritize debt repayments over that dividend growth, that share buybacks. It seems they've kind of shifted recently because they've started buying back shares. They had, I believe it was a 4% buyback plan that they just re-initiated.

But again, we're sitting on relatively low valuations historically for Railways. So now if you're going to buy back shares, 2022, 2023, probably wouldn't have been the opportune time to do it. But I mean, now that we're sitting on, you know, a little bit lower valuations now is probably a more opportune time. Yeah. And you can see that right with the interest coverage ratio. And obviously there's different ways to look at it.

We're looking at it here, just the EBITDA, so earnings before interest depreciation and amortization compared to the at it. We're looking at it here. Just the EBITDA, so earnings before interest depreciation and amortization, compared to the interest expense. So if you look back at the last 10 years for Canadian National Rail, it was always at a very sustainable level here. 13, 14, 15, even peaked around 16 times in 2022. The higher, the better. It just means they have like EBITDA's not net profits obviously but let's just say essentially their profits are covering by 16 times or whatever it is the interest expense. The lower the number is it's not that great. It's still manageable. It's at 9.6 right now but clearly there's not as much room as there was before.

And just on that to me, I'd be a little bit of a red flag for management to say, okay, maybe we need to get that interest coverage ratio a little higher. I have some trouble with that. I mean, maybe I'm just nitpicking here, but you tell me whether I'm being too critical. And I know CP is in that same range here but I think for them they actually have a good excuse as they massively expanded their network where Canadian National Rail doesn't have that and I know that CP has been slowly trying to pay down debt as well and they're not really raising the

dividend I think anytime soon either. Well they bumped it in their recent quarter by 20%. Oh they did Yeah, they just came. By 20%. Like, I don't know what their plan is, if they're going to go through one of their strings of multiple years of growth. But if you do look at these coverage ratios, I mean, you can see one thing is CNRail is trending downwards, whereas CP is actually over and above what they were pre-pandemic in terms of coverage ratios. And if you look at the chart, you'll

see a big dip down to 7x during 2022, but that was that acquisition. Like you're going to take on a ton of debt to fund that acquisition, and the synergies just aren't going to be there yet, whereas they're starting to now. And you're starting to see the improvement in terms of that. And I mean, from a like CN, what was CN at? Like nine? It was like nine. Yeah, no, and in the same range, but they went down from like mid teens.

Yeah, which is still like nine X is still a very comfortable ratio. But I mean, the one thing you want to see is it trending upwards. And, a leverage perspective, a debt perspective, I mean, CP looks to be a little more disciplined and it's starting to show in the results and should continue to grow just because of the overall results from Kansas City starting to hit earnings. Yeah. And you've probably paid more attention to CP recently but there when I last look at them last year They were still putting an emphasis on trying to pay down debt. Right? Yes, that's still the case with them Not well, I mean for a while they were but they have I have it in the notes somewhere here

But they they did end up, you know a bunch of debt came to maturity at by beliefs some 10 years that they were paying like 2.8% on, and they had to issue a bunch, a bit more debt that's now yielding 5%. So it was trending downwards, and now it's kind of flatlined, and they've started buying back shares and again, raising that dividend, which I mean, maybe they see more opportunity now that shares are kind of cheaper than they historically are. So they're going to allocate a bit more capital to buybacks and dividends versus repaying

that debt. I believe there are leverage. You can make the case, I guess, CP has more growth opportunity, but that is something too that would bug me a little bit for CP. I wish they would be paying down the debt and it seems like again it bugs me whenever management team are not focusing on the long term and just having just less debt is always good because it can really create some opportunities for you whether it's you know you invest in your network not necessarily expending it but making it more efficient. There's just things that you're able to do when you have more financial flexibility

with your balance sheet and you're not reliant on issuing debt or issuing more shares. Yeah. And I mean, in my eyes, they must see more opportunity in buying back shares now that they're, you know, I would I don't want to say in the in the gutter because they really aren't the real ways like they've been down, but they really haven't been down that much, but they're definitely cheaper now than they were a few years ago. And the fact that CP kind of cut down those buybacks in 2021, 2022 after the acquisition kind of gives me some confidence now that they're re-initiating the buybacks that it's

probably going to be a good use of capital because it was a very good use of capital when they were very aggressive on it pre-pandemic. Yeah, it just makes me wonder sometimes management teams, like, do they not see that refinancing debt is more expensive now? Like, oh yeah, like I said, those notes, yeah. They're there for everyone to see, like, I don't think bond yields are going down anytime soon. So it does make, I don't think bond yields are going down anytime soon So it does make I don't know it makes you wonder sometimes how they're focusing more on the short to medium term So I know I've been pretty critical Canadian National Rail, but I think CP also I think there are some questions to be asked there as well. Yeah like CP

I mean a lot of these companies operate on on leverage ratios, right? Which again is that EBITDA relative to debt. So I mean, CP hasn't paid off a ton of debt over the last while, but they've also realized a lot of benefits from the Kansas City Southern acquisition. So their leverage ratio has actually gone from 3.4 X to 3.1 X over the last year. So their position to pay their debt has improved, whereas their debt, I don't really think it's gone down all that much. I would have to look, let me see here. They're at 22.6 billion and when they bought Kansas City, they were, yeah, I mean, they've

reduced debt from 23.5 to, they paid off about a billion dollars in debt over the last year and a half. But because of the integration, their leverage ratio has actually gone down by 10%. Yeah, because they're making money. And again, like I said, you had mentioned, like they had that, they had a lot of, they had a 10 year, a lot of debt mature at 2.8% and they had to reissue some at 4.8. So as you had mentioned, debt is much more expensive right now than it was even pre-pandemic and especially during the pandemic.

So yeah, they're in a little bit better position because they have more growth overall. I mean, they have that acquisition that is trending in the right way much quicker than expected, which is causing the overall results to be a little bit better than CNRail. No, and that's a good point. In this kind of market, I like having some cash on the sidelines. It gives me the flexibility to

jump on opportunities when the right stock goes on sale. But just because the cash is waiting, it doesn't mean it shouldn't be working for me. That's why I use EQBank. They offer some of the best interest rate among Canadian banks, so my money's still earning while I wait. You can even get a boosted rate by setting up direct deposit for your payroll and depositing $2,000 or more per month into your EQBank account. Your cash stays liquid and ready to go when it's time to invest. And if you're not in a rush to access your funds, EQBank's

Notas Savings Accounts and GICs are great ways to grow your returns even more. It's a smarter way to park your cash. Visit EQBank.ca to learn more and keep your money earning even while you wait. As an investor, I'm always looking to reduce my fees, which is why I'm excited that Questrade now offers zero dollar commissions on stocks and ETFs. But Questrade isn't just about commission-free trading.

You can also get USD accounts, so I avoid forced currency conversion fees when trading US stocks. Plus, get access to their advanced edge trading platform available on desktop, web, and mobile. I've been using Questrade for many years and so has Simon. And their platform makes trading seamless whether you're managing a long-term portfolio or making active trades don't miss out start trading Commission free stocks and ETFs today visit quest trade calm to learn more Summer always gets extra busy weekends at the lake trips out to Canada's East Coast Vacations with the family chasing a bit of sunshine somewhere new.

Every time I'm away, and probably you as well, your place just sits at home empty. And since I'm already staying at a great Airbnb, why not have my own place generating a little income on the side while I'm gone? I've always thought it's a great idea, but it made me nervous to think about the work required. It's easier now with Airbnb's cohost network.

I can find a local trusted cohost to handle all of it. Guest check-ins, support, even cleaning, no stress, no extra work. If your place is often empty in the summer, maybe it's time to let it make some income for you. Find a cohost at airbnb.ca forward slash host. So now let's move on to the operating performance for both. There's some ratios that are more specific here to railways. So we'll give a quick definition

just so people are aware of them. So Canadian National Rail, the operating ratio, this one lower is better. So it's essentially the inverse of operating margins So clearly operating margins you want it to be as high as possible However, the operating ratio lower is better So the most recent quarter it was around 63% in terms of CP What are what's the operating ratio looking at here 62 and a half?

But that that declined from 64 they were okay yeah yeah that's good yeah so they're good it's going the right way so definitely something you want obviously the either sea stable or declining you don't want that to to go up and the revenue ton miles also known as rtm is roughly 60 trillion per year which was a slight improvement versus last year and that measures the volume of freight move so you simply multiply the amount of cargo moved by the distant traveled in miles and you want this to be stable or higher so in terms of RTMs what does CP look like? 53.7 and that was up 3.6% year-over-year so

probably relatively in line with CN Rail. Yeah and that's great because you can see how comparable they are almost on that level. Yeah. So that's interesting right there and the freight revenue per RTM again the higher the better here reflection it's more of a reflection of pricing power. So this one I think was 7.14. I believe this is cents if I remember correctly. I didn't put it. But this one which was a small improvement over last year.

So 7.14. And for CP? They had freight revenue per carload. and that was up 5.6% so a little better I think. Yeah that's good and then car velocity so this is just how quickly freight cars are moved through the network and again higher is better. So this was down 8% versus last year at 189 car miles per day. Yeah. First Canadian national rail. CP was flat in terms of car velocity so didn't grow didn't shrink. Yeah and that obviously there's it's always I guess it really depends it's a

mix I would say of demand and also I guess the quality of their network. Efficiency. Yeah. Yeah efficiency of their network. Efficiency. Yeah, efficiency of the network. There's just, you know, those rail cars can only go so fast. So you can't move them too quickly with all other things being equal, but also the demand and yeah, how efficient it is. Yeah, so CP, I mean, from an efficiency standpoint,

I mean, the trains, they're getting heavier, longer, yet more efficient. So they reported a 4% increase in car in length, train length, 5% increase in train weight, but fuel efficiency effectively stayed flat, which is, you know, they're kind of making improvements to the network, getting more efficient. I mean, if you can run heavier trains, larger trains, more goods during, you know, a relatively poor freight environment, you're probably going to realize those tailwinds on the upside. So in terms of efficiency, I mean, this is from both railways, I think are getting more and more

efficient as we move forward. But again, it's it should lead to might not necessarily lead to immediate results right now but that's more of the environment rather than the efficiency. When volumes improve should see a pretty good uptick. Yeah, no exactly and then in terms of revenues I know Canadian National Rail obviously it's a more mature business. It's been pretty stagnant over the last like three four years Right around 17. I think it would be 17 billion or yeah. Yeah, 17 billion annually on an annual basis It's been pretty much flat for the last four years roughly and then when you're looking at CP

I'm just pulling it up here CP. It's a bit of a different story, I guess, with the acquisition of, yeah, of Kansas City Southern. Yeah, so revenue increased by 8%, earnings per share increased by 14%. So in contrast, I believe CN Rail was like 8% earnings growth. I mean, a lot of that is gonna be acquisition-based for CP.

I also think that CN Rail, a lot of that is going to be going to be acquisition based for CP. I also think that CN Rail, a lot of their, you know, increases, increase in earnings per share also is, you know, an element of buybacks as well. Not too much. Like, I don't think they're going too crazy, but I mean, CP has been the faster grower in terms of earnings per share, but that does make sense. I mean, they laid out $41 billion to buy an entire new network. So that's obviously going to have some benefits, which is probably, you know, I believe, which is why the market kind of likes it a bit more right now than CNRail. Yeah. And I mean, CNRail, like profits would be essentially down over the last five years. Yeah. So if you're just looking at profit and not looking on a per share basis, Yeah, pretty much down over the last four or five years. It peaked in 2022 23 and then has been you know, decently down I would say just kind of rough math over the last couple of years probably down 15 percent or so

So it's not looking great. But then yeah, like you just mentioned cp makes you know, obviously you're adding essentially another business to your operation. So clearly it's going to make a little bit of the difference. So for them, net income has been trending in a better direction. But the last year or two, I mean, it's been a little more stagnant. So it's not, I think it just the the freight economy in general. I think going back to what Dhanay Bidof said for the trucking business I think

freight over the last couple years especially in the last year has definitely slowed down a little bit. Well and I think the trucking business is gonna get hammered way more than the rail business just because of how you know what these railway ship I I mean, oil grain, you know, things like that. So, you know, a lot of stuff that you just can't, you know, mass ship by truck. So it's not going to be impacted as much, but it's definitely, you know, the environment is not really good. Like railways are cyclical. I mean, they've performed so well over the last while that, you know, I wouldn't say a lot of people of people forget this but I mean the railways went on a very good run for a very long time

And they're kind of in the in the dumps right now But I mean they're cyclical companies obviously a lot of the stuff they move is heavily dependent on the economy and It's just kind of a few down years for them. I it's not gonna last forever. That's for sure Yeah, and I mean in terms of valuation It's just kind of a few down years for them. It's not going to last forever. That's for sure. Yeah. And I mean, in terms of valuation, that's probably why it's so difficult to own the railways right now in terms of actually adding to those positions is you're really banking on kind of long-term growth, multiple expansion. I guess you're banking on them returning more capital to shareholder because I mean on the

P basis you're looking at Canadian National Rail. If you're looking at trailing P of 20, price of free cash flow again looking on backwards basis about 28 and even on a Ford basis which I would take with a big grain of salt with the state of the economy right now. It's a little cheaper, 18 for P price earnings and 23 for price to free cash flow. But they're not like, they're not big tech expensive, but for the kind of growth you're getting, it's not cheap either. And I know CP, obviously that one, there's going to be some more growth here, but I think that

you're looking at same kind of valuation metric as it's not cheap if anything it's a little more expensive than Canadian National Rail. Yeah I believe CP trades at quite a big premium to CN Rail right now. It probably is because of the larger earnings growth and just overall synergies from the acquisition and just like I mean we've probably gone over this quite a bit in this episode, but I do just think it's the better brand well railway over the last decade. The results kind of speak for itself. I mean, you look at the overall returns of CP versus CNR.

CP has outperformed CNR by around 2.7 percent annually over the last decade. And if we go all the way back to the financial crisis, it's actually CPs outperform CN by 2.2% annually. When you're talking about, you know, 2.2% seems relatively small, but when you span that out over, what would be 17 years now, that's actually, it's quite a wide deviance there. Yeah, even over the last five years, right? You're looking at 70% total returns for CP. And then when you look at Canadian national rail, you're looking at about 32%. So it's quite the outperformance by CP there. It's definitely separated itself post pandemic.

I mean, there's never guaranteed that it will continue. But in terms of valuations, I mean, these companies are always expensive relative to the growth they put up. I mean, if you think about it, the assets they hold, like we had mentioned at the start of the episode, they're pretty much irreplaceable. I mean, the asset base they have is like, there's always going to be larger valuations in companies like this. We had mentioned the moat and the market, like you're not, you don't have any insider information on the moat these companies have.

The market is well aware that the business is pretty much irreplaceable. So it's just, it's just reflected in the price. This is typically, you know, what you'll pay for the railways. CP is trading at a pretty big premium across all historical averages, and I would imagine it is again that acquisition and just the expectation for larger growth. Yeah, and I guess you're paying for both of them a bit of a premium because of I think that

mode, right? Just the fact that they're very unlikely to get disrupted, and even if there's not that much growth, it's just very unlikely to get disrupted. And even if there's not that much growth, it's just very unlikely to get any of these were disrupted. And I guess to finish here, we can just go over a quick bull case and bear case for each. So I'll go, I'll start off with Canadian National Rail to wrap things up. So on the bull side, I would say they continue to improve their operating metrics. North America goes more and more into an integrated trade bloc as tariffs get removed. So yes, we're still looking at tariffs right now. But if you listen to geopolitical analysts and strategists, a lot of them will think

that yes, even though Trump has a weird way of doing stuff and he's a bit unpredictable, a lot of them are betting that eventually the end game is to have a kind of almost like a more of a trade block when you're looking at North America as a whole. So obviously that would benefit a company like Canadian National Rail, of course CP as well. I'm sure you'll mention something to that effect. You're also hoping that that will result in a growing North American economy with the US increasingly relying on Canadian

resources. So that would be a big, big boom not only for Canadian National Rail, for CP as well. And honestly I think to me would be just a better management team. I think that would be the bold case. It just I'm not a fan. I think to me would be just a better management team. I think that would be the bull case. It just, I'm not a fan. I think I've said it. I just don't think they're looking at the bigger picture. I think they're too short-term focused.

I think it would be great to see a team that would reduce share buybacks. They could keep the dividend as is, but really just pay down that debt, invest more heavily in the network, make it more efficient, and really just pay down that debt, invest more heavily in the network, make it more efficient, and then just have a better business long term. On the bear side, sorry, did you want to add anything there? Yeah, I would just say I guess maybe a shift in strategy from the same team or yeah. Yeah, they've been there long enough to be, like I've lost faith in them. I would like to see them gone.

That would be my personal opinion. But again, a shift in strategy could be good as well. On the bear side, operating metrics, I mean, if they don't improve, tariffs become more permanent and reduce demand for Canadian natural resources in general going to the US. Tariffs increase between Canada and overseas trade partners as well, reducing demand for sea-to-rail intermodal. And I guess that would be on the bull side, right? Is that tariffs with key trading partners outside the US are actually not increased or even potentially reduced in some cases so that the seat to rail actually picks up because that is a big part of their business as well.

And the leadership team just keeps making some bad capital allocation decision that would be the rest of the bear case. I don't know if there's anything I missed there. No, I mean the one element of the intermodal is interesting as well, is that's actually why I ended up buying a company like Cargo Jet a while ago, because of that element that a lot of the goods that come from China to Canada actually go through the US first, and then to Canada.

I mean, if you see more direct to Canada because of the entire terrorist situation, you definitely could see more demand in this regard. But in terms of CP, I mean, the bull case here outside of the normal stuff you had mentioned, like operating metrics. And maybe the last thing, sorry, just so people know what we're talking about. So when we say intermodal, just think about these big containers that can easily be taken from a ship to a truck to rail and interchange how you want that.

So that's basically what intermodal is. Yeah. Yeah. It's more consumer dependent, I guess, to intermodal because there's a lot of, you know, tinier items and yeah. But the like outside of what you had mentioned with the operating metrics and the tariffs and things like that, obviously, like the main bull case for CP rail is the acquisition.

I mean, it although CP trades at a premium to CR, it's also growing at a much faster pace. They expected like originally when they bought it, I believe they said they would get to one billion dollars in synergies in terms of revenue within three years. I think they're already hitting that. So they're early on that. And they actually, I believe it was two conference calls ago, two quarters ago, they actually up that they said it could be $1.5 billion annually. So I mean, the faster they can integrate that the better, which would, you know, it's leading to higher earnings growth right now. The other addition, I mean, the faster they can integrate that, the better, which would, you know, it's leading to higher earnings growth right now. The other addition, I mean,

the fact that CP now owns that only railway that spans Canada, US, Mexico could continue to be a tailwind, especially, you know, if all the trade tensions ease. And there's also an interesting potential for, we've seen them talk a lot about reducing the the provincial trade barriers, you know that's a good point. That could result and this would be the same for CNR and CP, I mean yeah a huge chunk of their network, I mean the majority of their network is going to be cross country Canada and in you know if we get rid of a lot of provincial trade barriers which existed and are now being revisited because of the whole, you know, buy Canada kind of, what is it, elbows up or whatever.

Yeah, because of the orange man. Yeah, exactly. Just say the orange man. Yeah, that's, yeah, to be honest, because of that, they're looking to get rid of a lot of the trade barriers that could, you know, it could increase cross-province shipping, which increases volumes. Often the Canadian side of these businesses are the most profitable, so ultimately, you're probably these businesses are the most profitable.

So ultimately you're probably increasing sales in the most profitable segment of the business. And I mean just overall, the improvement of the economy, increasing volumes. CP Rail has been the bright spot in terms of efficiency, heavier car loads, increased fuel mileage, more money made each car load. If volume picks back up, the investments they make in this efficiency will probably pay off. And I mean, the only bear case I can think outside of, you know, the normal railway bear cases would be, you know, the slower integration of Kansas City Southern. They took on a ton of debt. I believe they added like 300 million shares. They diluted a lot to make this acquisition. I don't think this is looking like that's gonna be

all that likely, because it's already going very well, but if there's delays here, it's trading at a relatively high valuation relative to CN Rail, so that could also put some pressure on it. Yeah, no, I think, and I think one last part that we missed was just the capital allocation, so maybe just a quick note on that. So in terms of Canadian

National Rail, they're forecasting to invest about $3.4 billion in capital expenditures this year. Most of it will be network improvements and maintenance and of course it's pretty normal for a business as mature a Canadian National Rail. It's not like they're really like we've said before necessarily like building new rails elsewhere because that would require regulatory approval. Yes it is a barrier to entry but it is it also makes it's expanding their existing network more difficult so it's going to be very focused on maintenance improvement efficiency and I guess before we wrap this up what does it look like for on the CPE side? I kind of integrated all this kind of stuff throughout the episode so I won't repeat much of it but the one thing I will say

is they have prioritized debt reduction a lot over the last you know few years but they kind of made the switch they raised a dividend 20% as we mentioned and they also announced a 4% buyback program. So I actually think the buyback program is probably pretty strong now that shares are in a multi-year slide rather than spending all that money on buybacks in 2022, 2023. And their guidance is for mid-teens earnings growth over the next few years while you see a company like CN Rail guiding to high single digits. So they're clearly pretty bullish here. They did mention that they expect returns on invested

capital get back to that 12% to 14% range over the next few years. And what about the CapEx? I guess maybe I should have formulated better. Just more like kind of CapEx. 2.9 billion. They're going to spend 2.9 billion this year. They expect it to normalize to around 2.6 to 2.8 through 2028.

They didn't really mention what the money will be spent on. I mean, the bulk of capital expenditures for these railways is just, you know, maintenance and kind of trying to improve efficiency of the, you know, the railway network in general. Yeah, no, I think that's a good overview I mean anything we forgot to mention or I think that's a good overview for people. Nope I think that's it. No yes on a closing note I think for me obviously as always this is not investment advice I don't own any of them CP has been on my watch list I was hoping that there'd be some more trade

disruptions and it would make the share price and the valuation go down a little bit for CP. It's been down a little bit but not down as much as I would have hoped. So maybe if we enter a recession it'll take a bit more of a hit and be a good buying opportunity. But of the two, CP is definitely the most attractive for me. I would say I'd still be very interested in Canadian National Rally either if the evaluation just gets too cheap to ignore, even despite some questionable decision from the leadership team or there is a change in philosophy or like I just said earlier, just a new management team. I think that would make me look at these company

a bit more again. I think it's really good for people to understand that if you own these companies, like don't expect to like crush the market necessarily. You're going to have businesses that will likely be pretty stable. I say likely because they're cyclical, they're not immune to like a recession or severe recession.

Like they will take a big hit because they're good bell, they're bellwether stocks for the economy. That's what it is. But long-term I think, you know, with the caveat of, you know, a big unforeseen event, they should do pretty well. Yeah. And I mean, obviously I had mentioned at the start of the episode that I sold CN Rail and bought CP. So obviously people know my opinions there.

I don't think CN Rail is a bad company whatsoever. I just found CP to be the better operator. So, I mean, you're picking between two very good companies here. And I just, I chose CP. But yeah, it's a good episode. It seems like the market is agreeing. Yeah, it seems like the market is agreeing with you. So I think that's a good point to wrap it up. Like we said earlier, if you enjoyed this, obviously, we made some notes and we're going back and forth.

I did my best in terms of screen sharing, making sure people saw the graphs on Joint TCI as best as I could because it's not easy to navigate while you're also going back and forth. So hopefully people enjoy that. If you like the format let us know. We can try and do some more comparing businesses whether it's two Canadian ones, one Canadian, one American, maybe an international company who knows Let us know if you enjoyed this video. Aside from that, we appreciate your support. And we'll see you again next Thursday for our news and earnings episode. The Canadian Investor Podcast should not be construed as investment or financial advice. our news and earnings episode.