Get on board the Canadian Railroad Stocks

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Railroad stocks have held up well in this volatile market. Major US railroads like Burlington Northern Santa Fe Corp (BNI), Norfolk Southern(NSC), CSX Corp (CSX), Union Pacific Corp (UNP) reported strong second quarter numbers and they seem to have provided shelter to investors fleeing the battered financial stocks. While fuel prices increased for many months, the railroads have been able to pass on the increased costs to customers in the form of fuel surcharges. This stable performance of the US railroads triggered the following question in my mind: How are the two Canadian railroads – Canadian Pacific (CP) and Canadian National (CNI) performing in this market?.

Overview of Canadian Pacific and Canadian National

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Note: Data used here is thought to be accurate.Do your own research before making any investment decisions.

CN Logo

Canadian National is the largest railroad in Canada. It operates a total of 20,400 route miles and has significant operations in the US as well with about 5,000 of its workforce. Domestic US operations accounted for about 19% of total revenue in 2007.It is the only Canadian railroad that connects the Pacific Coast, Atlantic Coast and the Gulf Coast in the US.Memphis, TN is one of the major hubs for CN.

Cp Logo

Canadian Pacific was the first railroad in North America to connect coast-to-coast in 1885. Besides Canada, this Calgary, Alberta based railroad operator has operations in the US NorthEast and the MidWest. CP generates most of its revenue from operations in the western Canada.Today the company has 13,200 route miles and is a major force in the movement of natural resources and goods from the western provinces of Canada to the US and other world markets.

Comparison of CN Vs.CP
Canadian National’s market cap. is about three times that of Canadian Pacific. The dividend yield of 1.73% is comparable to CP and US peers. In the past 5-years average annual dividend growth and EPS growth has been 24% and 26% respectively.

Last year forest products and automotive accounted for 26% of total revenue. For the second quarter of 2008, these two groups were down 14% and 13% respectively due to the slowdown in the US housing sector and the auto industry. CN transports large number cars assembled in Ontario factories to the US. Groups that had revenue increase int he last quarters were inter-modal,coal and other commodity related items. With the highly anticipated Prince Rupert container terminal in the Pacific Coast providing great access to the Asian markets it will be interesting to watch the impact of this investment in future quarters as inter-modal group revenue continues to remain strong. Even if the US economy continues to be in recession mode, CN should have stable revenues coming in from the movement of grains, oil, coal, chemicals etc. CN is probably a better play than CP because it has a larger US presence and is well diversified in terms of various commodity items transported.

The average annual dividend and EPS growth rate in the past 5 years for Canadian Pacific is 14% and 12% respectively. Canadian Pacific should continue to benefit from the demand for coal and oil from Alberta’s tar sands.

Last quarter CP reported flat revenue growth when compared to 2Q,2007. Recession in the US and the higher price of fuel forced CP to revise its 2008 guidance downward to $4.00 to $.20 diluted EPS from $4.40 to $4.60 announced earlier. Like CN, CP also experienced a decrease in revenue for the forest products group and growth in industrial, chemical,coal transportation.

Summary
Canadian Railroad stocks have had pullbacks in the past couple of months due to the crash in commodity markets and North American economic conditions. However these two stocks have solid fundamentals and are good picks for long-term growth. An investor looking to add some Canadian stocks to their well diversified portfolio may consider these two stocks. They are a proxy for the industrial sector and indirect plays of the Canadian natural resource story.

Disclosure: Long CNI,NSC,CSX

10 Highly Traded European ADR Stocks

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The following table lists the most traded ten European ADRs in the US exchanges based on the daily trading volume:

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ING and UBS are the two financials in this group.UBS suspended its dividend few months ago after heavy write-downs due to losses in the credit mess.So its not surprising that the stock is down nearly 60%.

Nokia was named as one of “The top 100 brands in the world” in the latest edition of BusinessWeek.

Total Fina (TOT), ING, NOK and ABB may good long-term stocks that
are attractive at these levels.

Long: ING,ABB

Three Australian Stocks with > 6% Dividend Yields

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A review about 3 Australian bank stocks that pay great dividends and have above average dividend growth rates.In the current market conditions nobody knows exactly where financials and in general the markets are heading. A simple and effective strategy now maybe to nibble a few foreign stocks that pay high dividends. One group that fits this idea are the Australian bank stocks.

All these 3 banks trade as ADRs in the US but only one (WBK) is listed in the New York Stock Exchange. The other 2 trade in the OTC markets. Here is a brief overview of these bank stocks:

1.Company Name: Westpac Banking Corp
Ticker: WBK
Country: Australia
Dividend Yield : 6.85%
Annual Dividend Growth for past 5-years: 13.35%

2.Company Name: National Australia Bank Ltd
Ticker: NABZY
Country: Australia
Dividend Yield : 11.32%
Annual Dividend Growth for past 5-years: 4.35%

3.Company Name: Australia & New Zealand Banking Grp Ltd
Ticker: ANZBY
Country: Australia
Dividend Yield : 9.08%
Annual Dividend Growth for past 5-years: 11.36%

Just like Canada,Brazil,Russia,etc. Australia is also a commodity-driven economy. So any volatility in that sector will affect Aussie stocks heavily. However compared to mining stocks, banks may not be battered that much. Besides Aussie banks have high exposure to New Zealand and many other Asian markets and nearby Pacific islands.

The Two Most Traded Brazilian ADRs

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Companhia Vale do Rio Doce (RIO) and Petroleo Brasileiro(PBR) are the two most traded Brazilian ADR stocks in New York.

Until recently RIO always used to be in the most active list in NYSE. But recently PBR seems to be joining this list as well. For example, today RIO had a volume of 40M and 35M shares of PBR changed hands. PBR is becoming an attractive stock for many investors including institutional funds as it is an oil play. Many emerging market and Latin America focussed funds hold PBR by default. Similarly RIO has been a long-time favorite of investors since it is in the mining sector and one cannot ignore natural resource stocks when investing in Brazil. Below is a quick review of the these two stocks.

1. Company Name: Companhia Vale do Rio Doce (Vale)
Ticker: RIO
Country: Brazil
Sector: Mining
Dividend Yield : 1.14%
P/E Ratio: 9.33

Beyond Brazil, RIO has operations in Canada, Australia, China, Indonesia,etc.The market cap. is $114 B and there are about 4.8B shares outstanding. The stock had a great run but cratered badly after the commodity boom crashed in emerging markets. From a high of $44 a few months ago, the stock has fallen to $23+ today.

RIO’s revenue has increased each year for the past 5 years and it has raised dividend at an average annual rate of about 22%. RIO is a great stock to play the commodity boom. But it is a risky sector to invest in as well since commodity prices will crash rapidly within a short time. The recent crash in oil and other commodities is proof of that. One should not invest in this stock unless they have a well diversified portfolio involving many sectors and spread over different countries and asset classes.

2. Company Name: Petroleo Brasileiro SA – Petrobras (Petrobras)
Ticker: PBR
Country: Brazil
Sector: Oil
Dividend Yield : 0.08%
P/E Ratio: 11.96

PBR is a perennial favorite of many Latin American investors. Its market cap. of $207B is bigger than Chevron, TotalFina, Eni Spa etc. PBR is up about 34% in 52 weeks. The company has great long-term growth as well with the 5-year revenue and earnings growth in the 40% range. The P/E is a bit higher than its peers but thats because PBR has better growth potential. After reaching a high of over $70 PBR goes for about $48 today.

Investing in Foreign Utilities via ETFs

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Austrian Mountains Lake

Photo: Austrian Mountain Lake

We invest in utility stocks for the dividends and stable growth. While there are many utilities such as FPL Group (FPL), Exelon (EXE) in the US, many others in countries outside of the USA offer higher growth and dividend yields. Finland based Fortum and Verbund of Austria are two such examples.

One way to invest in foreign utilities is by picking up individual stocks. The disadvantage of this method is that only some of these stocks are listed in the US markets. So a better and easier way to gain exposure to foreign utilities is by investing via ETFs, which cover many of the high quality utility stocks that are beyond the reach of US investors – unless one has the ability to invest directly in overseas markets.

The SPDR S&P International Utilities Sector ETF (IPU) and WisdomTree International Utilities Sector Fund (DBU) are two ETFs that invest only in foreign utilities. The iShares S&P Global Utilities Index Fund (JXI) has both US and foreign utilities but has high allocation to overseas utilities.

Foreign Utility ETFs Overview:

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1.iShares S&P Global Utilities Index Fund (JXI)

JXI is the largest utility sector ETF with assets of $231M and a dividend yield of 2.43%. The fund has 69 stocks with E.ON AG of Germany as the largest holding in the portfolio. As per the fund fact sheet dated June 30,2008 US stocks accounted for 36% of the portfolio. Germany is second with two (E.ON and RWE) of the largest utilities included. E.ON is the largest utility in Germany generating one-third of the electricity used. The average annual dividend growth in the past five years has been 18.5%. RWE AG is the second largest German utility whose five year average annual dividend growth is 23.42%.

Other top stocks in the portfolio are GDF Suez(France), Iberdrola (Spain), Enel Spa(Italy),National Grid plc(UK). Exelon Corp, FPL Group and Dominion Resources are three US utilities in the top 10 holdings. Year-To-Date JXI is down 11.5%. Utility companies from Chile,Brazil,Portugal,Japan,Finland,etc. are also represented.

2.WisdomTree International Utilities Sector Fund (DBU)

The dividend yield of DBU is higher at 3.59% with the total assets of the fund being $56.0M. Though its expense ratio is slightly higher than JXI, DBU is a truly international utility sector fund since it excludes US stocks and allocates the majority of the assets to European utility stocks (about 82%), which are traditionally great performers in terms of dividend yields and capital appreciation.

DBU has 77 stocks in the portfolio GDF Suez of France accounting for 10.15%, the largest holding. Similar to JXI it has E.ON, RWE, Iberdrola, National Grid, etc. as the top holdings. Utilities from Australia,New Zealand, Austria, Norway,Hong Kong form part of the portfolio.

3.SPDR S&P International Utilities Sector ETF (IPU)

State Street Global Advisors launched this fund in July of this year with total assets of just about $5M.

Like JXI, E.ON AG is the largest holding in the fund. Germany is the top represented country but IPU gives a higher weightage for Japan unlike the other two funds above. The expense ratio is lower than the WisdomTree ETF but the asset base has not grown to the levels of JXI and DBU.

Disclosure: Long FPL,VE