Canadian Pacific shares: an essential economic element

Founded in 1881, Canadian Pacific Railway (EAST: CP) (PC) provides rail services in Canada and the United States. It offers rail and intermodal transportation services and also carries bulk cargo, cargo freight and intermodal traffic.

Canadian Pacific enjoys a competitive advantage due to the industry’s high barriers to entry. Additionally, analysts currently have a favorable view of the company.

The rail industry benefits from high barriers to entry

Railways are very important infrastructures that are relied on to deliver essential supplies throughout North America. With exciting new technologies occupying the minds of many entrepreneurs, this classic technology doesn’t get much attention.

This is good for the rail industry, as it reduces the risk of disruption. However, even if someone wanted to disrupt the rail industry, it would be very difficult – and even more expensive.

Indeed, simply replicating the vast network of railroad tracks in North America would cost tens of billions of dollars. That’s why CP is willing to acquire Kansas City Southern for $30 billion instead of building its own tracks.

As a result, the industry has a very high barrier to entry, which has allowed CP to enjoy a duopoly in Canada.

Canadian Pacific does not have an attractive dividend

For dividend-loving investors, Canadian Pacific currently has a dividend yield of 0.8%, which is below the industry average of 1.29%. When looking at its C$2.3 billion LTM free cash flow figure, its C$557 million dividend payout looks safe.

Looking at its historical dividend payouts, we can see that its yield range has remained relatively stable over the past few years.

At 0.8%, the company’s dividend is near the lower end of its range, implying the stock price is trading at a premium to returns investors have seen in the past. . Therefore, investors seeking income have an interest in investing in government bonds.

Risks of investing in Canadian Pacific

To measure CP’s risk, I will first check to see if financial leverage is an issue. I do this by checking its debt to free cash flow ratio. Currently, that number is 8.6.

Overall, I don’t believe debt is currently a material risk to the business as its interest coverage ratio is 7.1 (calculated as EBIT divided by interest expense). In other words, its annual operating profit could repay 7.1 times its annual interest expense.

However, there are other risks associated with the business. According to Tipranks’ risk analysis, CP disclosed 25 risks in its latest earnings report. The highest level of risk came from the Legal and Regulatory category.

The total number of risks has increased over time, as shown in the image below.

The Taking of Wall Street

As for Wall Street, Canadian Pacific has a Moderate Buy consensus rating based on eight buys and three takes over the past three months. Canadian Pacific’s average price target of C$105.19 implies 10.3% upside potential.

Final Thoughts

The economy continues to depend on railroads to deliver goods across North America and will continue to do so for a long time. Therefore, investors who want to invest in essential businesses can consider CP.

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