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Here's Why Investors Should Hold Canadian National (CNI) Now

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Canadian National Railway Company (CNI - Free Report) is benefiting from pro-investor steps and solid liquidity. However, low freight revenues are worrisome.

Factors Favoring CNI

We are impressed by the company's efforts to reward its shareholders. To this end, the company's board approved a dividend hike of 8% in January. This marked CNI’s 27th annual dividend increase.

Despite the ongoing turbulence, its decision to hike dividend payment is encouraging. Its ability to generate free cash flow supports shareholder-friendly activities. In 2022, the company generated free cash flow to the tune of C$4,259 million compared with C$3,296 million in 2021. In second-quarter 2023, Canadian National generated free cash flow of C$1,100 million compared with the year-ago quarter’s C$997 million.

CNI’s liquidity position is impressive. Its current ratio at second-quarter 2023 end was 0.93, higher than 0.74 reported in the first quarter of 2023. A rising current ratio implies that the company has enough liquid assets to cover its short-term liabilities.

Key Risks

Freight revenues (C$3,894 million), which contributed 95.9% to the top line, decreased 7% year over year in the second quarter of 2023. Freight revenues at the Petroleum and Chemicals, Forest products and Intermodal segments tumbled 10%, 6% and 26%, respectively. We expect freight revenues to decline 5.5% in third-quarter 2023 from third-quarter 2022 actuals.

Zacks Rank

CNI currently carries Zacks Rank #3 (Hold).

Key Picks

Some better-ranked stocks for investors interested in the Zacks Transportation sector are GATX Corporation (GATX - Free Report) and Triton International Limited .

GATX, which presently carries a Zacks Rank #2 (Buy), has strengthened its railcar leasing operations. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For third-quarter and full-year 2023, GATX’s earnings are expected to register 36.6% and 14.3% growth, respectively, on a year-over-year basis.

Triton, which currently carries a Zacks Rank #2, is benefiting from its consistent efforts to reward shareholders through dividends and share repurchases.

Triton has an impressive liquidity position. Its current ratio (a measure of liquidity) was 3.83 at the end of second-quarter 2023. A current ratio of more than 1 often indicates that the company will be easily paying off its short-term obligations.

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