Is CP Rail Stock a Good Investment in July 2023?

Canada has many industries that are consolidated, and railroads are one of them. It is dominated by just two giants, each with their own strengths. The benefit of being part of a consolidated industry is that there is limited competition that threatens the operations and growth of existing players.

Canadian Pacific Kansas City (TSX:CP), or the former CP Rail, could be the more attractive purchase of Canada’s two rail giants.

The company

Canadian Pacific has greatly expanded its reach, thanks to the merger with US-based Kansas City Southern. Its railway now connects three countries: the US, Canada, and Mexico, making it ideal for businesses looking for stable, affordable, and extensive freight services in all three countries. .

Its large railway network now connects 11 ports in three countries. It also connects 23 auto parts manufacturers, with a collective reach of over 200 million consumers in three countries. It is already a core part of the North American agricultural supply chain, transporting grains and fertilizers to both countries. It is now expanding its reach to many new markets.

The stock

CP Rail stock is already one of the best growers among blue-chip stocks in the country. It’s up nearly 300% over the past decade, and the total return is even higher if you throw in dividends. Barring a few bumps in the road, the growth pattern has continued over the years, albeit in a relatively weak/uncertain market.

The stock is up about 14.7% over the past 12 months, outperforming the TSX over the same period by a significant margin. The stock also deserves consideration as a long-term Dividend Aristocrat. However, dividends do not make up a significant enough portion of its total returns to be a major impact factor compared to its growth potential.

The 14% rally in the last 12 months, while beating the market, is not very strong considering the stock’s long history of growth. However, it is important to understand that with this acquisition, the company increases its basic strength and has access to new markets and new growth opportunities.

This can increase the already attractive growth potential in the long run. The stock stands to offer you more than three times capital growth over the next 10 years, if it repeats its performance over the past decade. However, if the growth potential is enhanced, the volume becomes more attractive.

Silly takeaway

Arguments can be made in favor and against buying this stock in July 2023. The stock is slightly discounted now, but the payout ratio is higher. The next earnings report may not push it to undervalued stocks pool on the TSX, even if it CAN making the valuation more attractive.

However, a strong TSX can push the stock by a decent margin in the past, and you’ll miss out on the growth that happens between now and then.