Want to make a pure infrastructure play? What could be better than investing in freight rail. North American railroads carry the bulk of imports, exports, food, grain and other cargo back and forth through the U.S. and Canada – sometimes the same product, multiple times. This even makes railroads a unique way to play the agricultural sector without having to invest in certain big seed companies with some questionable practices.
Rail transportation can be divided into the transport of cargo and the transport of people. In the US, Amtrak is the passenger carrier; in Canada it is VIA Rail. There are 4 publicly-traded freight rail carriers in the US and 2 in Canada.
Top 6 Canadian and US Freight Rail Stocks
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1. Union Pacific Corporation (NYSE: UNP) – The largest US freight railway. Operates in Western U.S. Also invests in wind energy. Union Pacific transports automotive, chemical, electric and agricultural products. Market Cap: $29.1 billion. Yield: 1.77%
2. Canadian National Railway Co. (TSX: CN) – This is where you go if you want to capture the majority of the Canadian market. This stock is over 3 times the size of its nearest competitor (below). Market Cap: 24.9$ billion. Yield: 1.9%
3. Burlington Northern Santa Fe Railway (NYSE: BNI) – Now better known as the BNSF Railway. Delivers a wide range of products from clothing, cars and coal to toys and other household goods. Also in two Canadian provinces. Market Cap: $26.9 billion. Yield: 1.89%
4. Norfolk Southern Corporation (NYSE: NSC) – Operates in the Eastern U.S., connecting to, but not entering Canada. Specializes in carrying automotive and metals products. Market Cap: $17.2 billion. Yield: 2.8%
5. CSX Corp (NYSE: CSX) – Based in Jacksonville, FLA. and operates in 23 states East of the Mississippi and connects to Ontario and Quebec. Also provides intermodal connections via trucks and terminals. Market Cap: $17 billion. Yield: 1.91%
6. Canadian Pacific Railway Ltd (TSX: CP) – Much of this company’s business comes from connections it maintains with other carriers, allowing it to serve through the U.S. and Mexico. They also offer specialized service to Alberta’s oil sands development properties. Market Cap: $8.3 billion. Yield: 2.00%
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Why You Can’t Invest In Amtrak or VIA Rail
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Amtrak is operated by the National Railroad Passenger Corporation, which is entirely owned by the U.S. government and is headquartered in Washington, DC. It was organized in 1971 and its board of directors is appointed by the United States Senate.
Similarly, VIA Rail is an independent Crown Corporation formed in 1977 and is operated on behalf of the Government of Canada. Aside from these similarities, however, Amtrak is much more severely underfunded than VIA and as a result a less efficient way to travel. While no company is ever perfect, VIA Rail earns its current slogan: “A More Human Way To Travel.”
Possible Downsides To Investing in Railways
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I’ll assume you know the upsides – that’s why you’re interested to begin with. Three of the main drawbacks to railway stocks that I can think of are the following:
1. Somewhat inflexible growth ceiling. Unless billions or trillions are spent on the laying down of new railroad tracks, there is somewhat of a limited upside to these stocks, whose trains share and must travel on the same tracks. There are only so many trains that can fit in the same hours each day.
2. Highly sensitive to many other sectors. Because these shipping companies get their business from so many different sectors of the economy, they are not recession proof. A drop in auto sales, mining production and bans on imported beef can all take away from their business.
3. Low dividends. Like many oil and gas companies, the railroads tend not to pay very much in dividends. Thus they are not ideal for someone looking to grow their income or living on fixed income. These investors would do better to look at pipelines and utilities instead.
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{ 5 comments… read them below or add one }
The west coast port Alberni is on CN hooks; the only rail into the place and because of this there has been little interest in the port because CN is the only carrier and merchandisers do not want to be on the CN hooks.
You’d think that would give them a competitive advantage. Is there something else about CN because of which merchandisers wouldn’t want to go with them?
Locked into CN puts you at the mercy of unstable service because of unions mostly. Even the multi service choices in Alberta are swinging away from CN; in most cases moving to trucks or CP because of the load they put on contracts. Fill 50 cars and you get a deal kind of thing.
Interesting. Looks like CP is working to improve market share. Both stocks are moving in tandem lately, though. Both down roughly same amount and similar share prices, too.
Update: Buffett has just completely bought out the BNSF Railways. He paid a premium for it, too, paying a total of 34 billion. Wow. Total bull bet on the US economy.