Tuesday, September 4, 2012

Canadian Pacific Railway

On my other blog I am today writing about what to read for novice investors. I think that if you want to learn about investing today I would suggest reading some blogs rather than any particular book. One of the blogs I follow is The Dividend Monk continue...

I do not own this stock of Canadian Pacific Railway (TSX-CP, NYSE-CP), but I used to. I originally bought it in 1987 and held it for almost 12 years before selling it. I was not impressed with how it was doing and that is why I sold. I made a total return of 5.40% per year, with 4.82% coming from dividends and .058% from capital gains.

I wanted some more railway stock in 2006 and CP had a relatively better price than CNR so I bought CP. I held it until September 2011 and decided to sell and buy Canadian National Railway (TSX-CNR). I thought I should have one railway company and so I decided to go with CNR. This second time I held the stock for almost 5 years and make a total return of only 0.41% per year. Dividends accounted for 1.77% per year of this total return and I had a capital loss of 1.36% per year. (CNR had been doing better with a total return of some 12.5% per year over the same period.)

I obviously sold CP at the wrong time. If I had waited for the end of the year, I would have done much better. However, CNR would have cost me more. I think that if you want to sell one stock and buy another, it is probably best overall to do the buy and sell in a low market. You may sell low, but you also buy low. This is, of course, a tactical decision.

Total returns over the past 5 and 10 years are much better than what I earned. The 5 and 10 year total return for this stock is 19.20% and 9.78%. The dividend portion of this total return was 2.37% and 1.69% per year over the past 5 and 10 years. The capital gain portion of this total return was 16.83% and 8.09% per year over the past 5 and 10 years. These are quite good returns.

Current dividends are moderate to low at 1.7%. Dividend increases are moderate at 8.73% and 9.35% per year over the past 5 and 10 years. The most recent increase came in 2012 and was quite good at 16.7%. The Dividend Payout Ratios are low as would be expected from a dividend of 1.7%. The 5 year median DPR for earnings is 27% and for cash flow is 30%.

The DPRs point out that EPS was higher than CFPS. This is unusual as you would expect the EPS to be lower than the CFPS. Some people think that it is not good for a company's earnings to be higher than its cash flow. (It is a warning that the company may underperform.) The EPS/CP Ratio on this company has been higher than 1.00 (i.e. EPS higher than CF) since 2009. For a reference to work done by Professor Richard Sloan on this subject, see an investing Daily article on DPRs. It is reference under the 5th section called "Cash Flow or Earnings?"

If you have never heard of Professor Richard Sloan, he works at the University of California, Berkeley. He has done studies on the relationship between accounting information and stock returns. See his Bio.

Most growth under this company is not great. The Revenue growth is just 2.5% and 3.4% per year over the past 5 and 10 years. Outstanding shares have grown slightly each year over the past 5 and 10 years, so Revenue per Share is lower coming in at 0.7% and 2.7% per year over the past 5 and 10 years.

Earnings per Share growth is not really there as EPS has a 5 year decline of 7.8% per year. However, EPS did grow over the past 10 years at 3.6%. Book Value per Share growth is nothing to write home about either, although, I guess the 10 year grow is not bad. Over the past 5 year BVPS has declined by 2.6% per year. BVPS has grown at 6.3% per year over the past 10 years. BVPS has declined over the past 2 years, but it grew over the first two quarters of 2012.

The Return on Equity is quite good with the ROE at the end of the financial year of 2011 at 12.3% and the 5 year median ROE at 12.3%. However, the ROE based on comprehensive income is -1.7%. This is quite a difference and would suggest that the earnings are not as good as they appear. (This would also be a warning to be careful with this stock.)

The current Liquidity Ratio is low at 0.84. When this ratio is less than 1.00 it means that the current assets cannot cover the current liabilities. This improves to 1.25 when you include cash flow less dividends. This is fine, but I would prefer it to be 1.50. The Debt Ratio is fine at 1.52. The current Leverage and Debt/Equity Ratios are ok at 2.92 and 1.92.

People expect this company to perform better under its new CEO, Hunter Harrison. See Globe and Mail article on Harrison taking over CPR. Hopefully this will be true.

This company is a transcontinental railway operating in Canada and the U.S. Its rail network serves the principal centers of Canada, from Montreal to Vancouver and the U.S. Northeast and Midwest regions. Alliances with other carriers extend its market reach throughout the U.S. and into Mexico. Canadian Pacific Solutions provides logistics and supply chain expertise. Its web site is here CPR. See my spreadsheet at cp.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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