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The railway stocks have been rather underwhelming performers over the past few years. And things do not look to be getting off on the right track so far in 2025 (please pardon the pun), with Trump tariffs on Canadian goods exported from Canada into the U.S.
Add retaliatory tariffs into the equation, and cross-border transportation may stand to take a bit of a hit for some time. Either way, I wouldn’t panic-sell shares of either CN Rail (TSX:CNR) or Canadian Pacific Kansas City (TSX:CP) in response to the beginning of a potentially nasty tit-for-tat tariff spat.
Could tariffs hit the railways hard?
Undoubtedly, many economists also see the Canadian economy falling into a recession in just a few months after tariffs are imposed. Indeed, if tariffs go higher than 25% (and 10% for crude) in response to retaliatory measures, perhaps a recession could be in store a lot sooner.
Either way, it’s a tough time for many Canadian businesses as they scramble and supply chains move into disorder again. At this juncture, I’d be more inclined to be a net buyer of the battered rail stocks than a seller.
Just last night, President Trump seemed to think tariffs would merely cause “a little bit of pain.” Whether that “little bit” entails transitory pains (think like transitory inflation) until tariffs are lifted remains the big question. Either way, the hope is that some compromises can be made so that both economies can prosper in 2025. In the face of tariff threats, is CNR or CP the better bet? Let’s find out.
CN Rail
CN Rail stock is back in a bear market, now down around 20% from its all-time highs. With a 2.52% dividend yield, you’ll get paid quite a bit to wait. Personally, I find the name, which goes for 20.4 times trailing price to earnings (P/E), to be a great value stock.
Aside from CN having a dividend yield that’s close to the highest it’s been in recent memory, I’m a fan of the dividend-growth trajectory from here. Indeed, I expect some generous (think around 10%) dividend growth every single year, even if tariffs cause a Canadian recession to happen in 2025. All considered, I view CNR stock as a great pick-up right here in the midst of profound uncertainty. The 0.64 beta is also way too low.
CN Rail chief executive officer Tracy Robinson thinks that her railway can hold up in the face of tariff threats. Though she acknowledges the potential impact, she doesn’t view it as “so significant or prolonged as to cause a recession in Canada or significant inflationary impact in the U.S.”
Indeed, Robinson seems hopeful and optimistic and she may very well be right to be. Of course, only time will tell what’s to happen to Canada’s economy and tariffs as the spring season approaches. Indeed, cross-border trade may not get dented by a considerable amount over the long haul, especially if Trump tariffs are transitory in nature.
CP Rail
CP stock has been under pressure but is just down around 10% from its highs. At 27.7 times trailing P/E, the stock is expensive, especially in the face of tariff-related uncertainties. Personally, I’d rather wait for an entry point below $100 per share before jumping in.
Indeed, with tariffs and a recession potentially on the table, I’d want a wider margin of safety. Though CPKC remains a growthier railway, I do think that the premium multiple may not be worth paying when you’ve got a name like CNR with a much higher dividend yield at a fraction of the P/E.