Why Invest in North American Railroad Stocks

The railroad industry is one of the most important pillars of the US economy. Despite the growth of trucking companies since the birth of the interstate system and the arrival of express delivery with aeroplanes, railroads dominate the shipping industry. Much of the nations goods still move by rail than by other means of transportation including planes, trucks, ships and barges. From an investment perspective railroad stocks offer some of the best opportunities for investors especially for those looking to hold for the long-term, measured in years or decades.

Ten reasons to invest in North American railroad stocks are listed below:

  1. Unlike many other countries, the entire railroad network in North America is privately owned and operated.
  2. The US railroad network is huge with nearly 140,000 miles of tracks. This helps ensure most of the country is covered for reaching both shippers and receivers.
  3. American railroads are extremely efficient and highly profitable. For example, Norfolk Southern owns over 19,000 miles but with a total employee count of less than 31,000 keeps earning substantial profits quarter after quarter.
  4. While trucks account for about 58% of all freight moved in the country in terms of values railroads are responsible for about 16%. However rising congestion on US roads and the decaying interstate network may force some shippers to consider trains for transportation of goods.
  5. The North American railroad industry is an oligopoly. In addition, most of the railroads are monopolies in the market they operate. This gives them pricing power that are unheard of in other industries. For being one of the largest countries in the world with a highly competitive economy, the total number of major railroads is less than 10.
  6. Some goods are ideally suited for transportation by trains than by trucks or planes. For instance, commodities such as coal and grains such as wheat are best suited for shipment by trains. For many years now, even crude oil is being moved by trains as oil pipelines have capacity and other problems.
  7. Railroad stocks deliver returns consistently over the years and are excellent for long-term investment. As profit increases, railroads also increase their dividend payments frequently juicing up the overall total returns. For example, Union Pacific raised its dividend by 10 percent in February of this year.
  8. Similar to the US situation, Canada is also dominated by just two railroads – Canadian National in the Eastern part and Canadian Pacific in the Western areas of the large country. So Canadian railroad stocks are also good for the long run.
  9. North American railroads are in the process of overhauling their operations with PSR (Precision Scheduled Railroading) pioneered by the late Hunter Harrison. This process involves running long and fast trains to improve efficiency. This and other technological improvements should drive earnings even higher in the coming years.
  10. Compared to Europe, US moves most goods by trucks. Europe moves a higher portion of the goods by rivers, canals and rails. With rising concern over pollution by trucks, lack of skilled truckers, weather and other issues noted above, railroads offer a viable alternative to shippers. Hence there is a potential for further growth in the industry. Air transportation is expensive and most rivers are dammed making them impassable for barges. Movement of goods between US ports buy ships is also constrained by the decades-old Jones act that requires ships transporting goods between two US ports be built in the US. All these factors make investment in railroads a wise strategy.

Sources: AAR, BTS

How to invest in North American railroads?

The best way to invest in railroad stocks is via individual stocks. Investors with a decent amount of funds, can split their money among a few of these companies.

The Class I railroads are the biggest in terms of their sizes. Only 6 public Class I railroads exist today. These firms trading on the  exchanges are as follows:

  1. Canadian National Railway Co (CNI)
  2. Canadian Pacific Railway Ltd(CP)
  3. CSX Corp (CSX)
  4. Kansas City Southern (KSU)
  5. Union Pacific(UNP)
  6. Norfolk Southern Corp(NSC)

Disclosure: Long CNI, CSX, UNP, NSC

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