Riding the Rails to Profit: How to Invest in North America's High-Dividend Railway Stocks

The freight rail network moves one-third of all exports in the region and roughly 40% of long-distance freight volume. In 1900, there were over 130 major railways in America. Today there are only seven freight train companies left in the United States and Canada. The industry has seen massive consolidation over the past century through mergers, acquisitions, and bankruptcies. The remaining railroads are some of the largest transportation corporations in North America.

■ The integration of trade in North America has brought about more opportunities for freight train transportation.

As the United States reduces its import dependence on Asian countries, nearshoring has promoted Canada and Mexico's exports to the United States. Besides, the United States-Mexico-Canada Agreement (USMCA) has significantly promoted trade between the US, Canada, and Mexico. Canadian Pacific Railway (CP) is the only company that spans the train network of the three countries.

The development of e-commerce is another important factor promoting the freight market. Some train freight companies have begun to cooperate with truck companies to launch intermodal transportation and charge higher fees.

■ Freight prices rose sharply, but long-distance shipping remains economical compared to trucks

Increased trade volumes in auto parts, liquefied natural gas, gold, timber, etc., have contributed to the growth in freight rates. According to Costmine Intelligence, cost climbed from $0.107 per ton-mile in 2020 to $0.160 per ton-mile in 2023 for a 1,000-mile distance. The U.S. Bureau of Labor Statistics also showed steep upward price increases after 2000.

Despite the price hikes, railway freight is still cheaper compared to trucks in long-distance transportation. For example, according to RSI Logistics, the movement of a bulk commodity from Houston, TX to Cleveland, OH by truck costs approximately $ 5,159 per load, whereas rail cost would be $ 6,676 per car. However, one railcar equates to four truck loads. Therefore, train freight is 67.3% cheaper than truck in this example.

■ PSR reshaped the North American railroad system

Precision scheduled railroading (PSR) is a concept in freight railroad operations pioneered by E. Hunter Harrison in 1993, and adopted by nearly every North American Class I railroad. PSR fundamentally changes the traditional model of railroading by implementing fixed schedules for freight trains, akin to those of passenger trains, rather than dispatching trains only when there is an accumulation of enough loaded cars.

Railroads streamline their operations through the reduction of freight car and locomotive inventories, which in turn necessitates fewer employees to handle the same level of traffic. This leaner operational model leads to a notable reduction in operating expenses.

Harrison first introduced PSR at the Illinois Central Railroad (IC), where he became CEO in 1993. He implemented it at Canadian National after they acquired IC in 1998. After retiring from Canadian National, Bill Ackman recruited Harrison to take over leadership of the Canadian Pacific and implemented precision railroading there. He changed the CP's operating situation through radical reforms. After that, Harrison also served as a senior executive of the CSR railway in the US. All major railway companies in the United States except Buffett's BNSF operate the PSR operation method.

■ Major railway stocks distribute stable dividends

Benefiting from PSR, North American train stocks have maintained considerable revenue growth and continued to pay reliable dividends.

In addition to paying dividends, some companies are expanding capital expenditures to increase transport capacity. Canadian National is building a 29.2-mile branch to reach a massive, $7.5 billion potash mine that's under construction about 85 miles east of Saskatoon, Saskatchewan. Main track construction has begun this year, with completion scheduled for September 2025. Canadian National Railway will haul the potash to British Columbia for export

■ Possible weakening of demand could be a potential risk

As freight prices rise and fall with inflation, the continued decline in CPI since last year means that the growth rate of freight rates may slowdown. The stock retreat in the latest quarter partly reflected the slowing down trend of inflation. In addition, as bulk commodity transportation still occupies an important market share, the decline in coal demand in the long run could also cause excess transportation capacity.

Besides, the U.S. election may bring uncertainty to NAFTA; the unexpected weakening of the Canadian economy since the beginning of the year has also increased uncertainty.