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Here's Why You Should Retain Canadian Pacific (CP) Stock Now

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Canadian Pacific Railway Limited (CP - Free Report) currently benefits from the buyout of Kansas City Southern and shareholder-friendly efforts. However, high debt is worrisome.

The long-term (three-to-five years) expected earnings per share (EPS) growth rate for Canadian Pacific is pegged at 9.6%.  

Factors That Augur Well

We are encouraged by Canadian Pacific’s decision to pay out dividends even in the current uncertain scenario. CP paid out dividends worth C$507 million in 2021, up 8.6% year over year. In first-quarter 2022, CP distributed dividends worth C$177 million, up 39.3% year over year.

In December 2021, Canadian Pacific announced the completion of the buyout of Kansas City Southern for $31 billion (inclusive of the $3.8-billion outstanding debt).  Following the closure of the acquisition, shares of KCS were placed into a voting trust with Dave Starling, former KCS president and CEO, appointed as the voting trustee. The voting trust, which ensures that KCS will operate independently of CP, will remain in place until the U.S. Surface Transportation Board gives its decision on the companies' joint railroad control application. The STB review is expected to be completed in the fourth quarter of 2022.

A Key Risk

Canadian Pacific is a highly leveraged company. Its debt-to-equity ratio (in terms of percentage) currently stands at a high of 53%. A high debt-to-equity ratio does not bode well and is risky as it implies that CP is aggressively financing its growth with debt.

Zacks Rank & Key Picks

Canadian Pacific currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader Zacks Transportation sector are Ryder System, Inc. (R - Free Report) , C.H. Robinson Worldwide, Inc. (CHRW - Free Report) and GATX Corporation (GATX - Free Report) .

Ryder has a trailing-four quarter surprise of 48.2%, on average, with its earnings having surpassed the Zacks Consensus Estimate in all the last four quarters. R is benefiting from improving economic and freight conditions in the United States. Revenues in all segments grew (on higher rental revenues, new business and favorable pricing) in first-quarter 2022.

R currently sports a Zacks Rank #1 (Strong Buy).

The expected long-term (three-to-five years) earnings per share (EPS) growth rate for C.H. Robinson is pegged at 9%. Improving freight market conditions are aiding CHRW. In first-quarter 2022, the top line improved 41.8% owing to favorable truckload pricing for customers and handsome profits in ocean freight.

Driven by the positives, the stock has rallied 9.7% in the past year.  CHRW currently sports a Zacks Rank of 1.

GATX has a trailing-four quarter surprise of 40.1%, on average, with its earnings having surpassed the Zacks Consensus Estimate in all the last four quarters. The gradual improvement in the North American railcar leasing market is a huge positive for GATX.

Driven by the upsides, the stock has risen 11.8% in the past year.  GATX currently has a Zacks Rank #2 (Buy).