Canadian National Railway: A Steady Engine for Dividend Investors

The transportation sector has long been a haven for income-focused investors, but few companies in the space boast the combination of dividend reliability, defensive moats, and undervalued pricing that Canadian National Railway (CNI) currently offers. With a 29-year dividend growth streak, a 7.31% average annual dividend increase, and a 47% payout ratio that leaves room for sustained growth, CNI stands out as a top-tier income play. Now trading at a 11% discount year-to-date, the stock presents a compelling entry point for investors seeking stability in an uncertain market.

Dividend Sustainability: A Foundation of Resilience

CNI's dividend strength is rooted in its 47% payout ratio, well below the 60% threshold that often signals dividend risk. This conservative ratio is supported by a robust cash flow: its cash payout ratio (dividends as a percentage of operating cash flow) stands at 68.6%, leaving ample room for reinvestment. Over the past decade, CNI has grown dividends at a 7.31% annual clip, outpacing inflation and most peers.

The company's 29-year dividend growth streak—marking it as a Dividend Aristocrat—underscores its commitment to shareholders. Even in 2025, despite a slight dip in growth to 0.00% year-over-year, the dividend remains intact, reflecting financial discipline. Analysts at Zacks estimate 9.07% earnings growth in 2025, which should fuel future hikes.

Growth Trajectory: A Network Advantage

CNI's $250 billion in annual goods transported across its 19,000-mile rail network provides a defensive moat that insulates it from economic cycles. Its exposure to commodities like grain, oil, and intermodal freight creates recurring revenue streams. Meanwhile, the company's $3.4 billion 2025 capital program focuses on efficiency and capacity expansion, ensuring long-term competitiveness.

The dividend's 2.52% yield exceeds both the 1.52% industry average (Transportation - Rail) and the 1.55% S&P 500 average, offering income investors a premium payout. Combined with its Normal Course Issuer Bid (NCIB) to repurchase up to 20 million shares, CNI's shareholder returns (dividends + buybacks) are a $2.4 billion annual proposition, enhancing long-term value.

Valuation: Undervalued After YTD Decline

CNI's recent 11% YTD price drop has created an attractive entry point. At current prices, the stock trades at a 15.2x forward P/E, below its five-year average of 17.5x and the sector's 18.3x multiple. Zacks' 9.07% 2025 earnings growth forecast suggests the stock is primed for a rebound, especially if commodity demand stabilizes.

The company's strong balance sheet—with an adjusted debt-to-EBITDA ratio of 2.5x, comfortably below the 3.0x threshold for investment-grade stability—further supports its ability to fund dividends and buybacks.

Investment Thesis: A Core Holding for Income Investors

CNI's blend of dividend safety, growth, and undervaluation makes it a top core holding for income-focused portfolios. Key drivers include:
1. Sustainable Dividend: The 47% payout ratio and $6.7 billion trailing free cash flow ensure dividends remain secure.
2. Defensive Earnings: Its commodity-linked business and cross-border logistics dominance shield it from macroeconomic downturns.
3. Shareholder Returns: The $3.4 billion capital program and NCIB reinforce long-term value.

Risks and Considerations

No investment is risk-free. CNI faces headwinds from trade tensions, fuel price volatility, and labor disputes, which could pressure margins. However, its dividend safety rating of A+ and 29-year growth streak suggest these risks are manageable.

Final Analysis

Canadian National Railway is a paragon of dividend reliability in a sector where many peers have faltered. With a 2.52% yield, a 47% payout ratio, and a fortress balance sheet, it offers income investors a rare combination of safety and growth. Pair this with its undervalued price and Zacks' bullish earnings outlook, and CNI emerges as a must-own stock for portfolios seeking steady returns.

For income-focused investors, the timing is ideal: buy before the next ex-dividend date (June 7, 2025) to capture the 2.5% yield and benefit from a stock poised to rebound. CNI isn't just a dividend stock—it's a core holding for the next decade.