Canadian Pacific Railway (TSX:CP): A Top Wide-Moat Stock to Buy and Hold Forever

CP Rail keeps the goods moving around the country. Here’s why it’s a great pick for new investors.

| More on:
rail train

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Warren Buffett famously said that investors should buy the stocks of great companies and hold them forever. At the Motley Fool, we take Buffett’s advice to heart and believe in the power of a long-term perspective when it comes to investing.

Although everyone likes to find a good, undervalued stock, sometimes it is better to buy the stock of a great company at an okay price, as opposed to the stock of a mediocre company at a good discount. The stocks of businesses with sustainable, excellent performance make ideal buy-and-hold stocks.

For this reason, new Canadian investors should focus on the stocks of blue-chip companies with excellent fundamentals, understandable business models, essential products and services, wide economic moats, solid financial ratios, and good management.

Canadian Pacific Railway

My beginner stock pick today is Canadian Pacific Railway (TSX:CP)(NYSE:CP). CP has a network of 13,000 route miles of track spanning Canada and the United States and has been in operation since 1881. These railways are the artery system of our economy and are absolutely vital.

Canada’s supply chains depend on CP’s ability to move goods cheaply and efficiently across the country. As a result of this dependency, CP enjoys a strong wide economic moat, with little fear of disruption. It operates in a virtual duopoly with just one other major competitor.

As a result, CP enjoys a very strong operating margin of 44.75% and profit margin of 36.07%, with return on equity of 13.57% and return on assets of 4.80%. These are excellent financial ratios that point to the strength of CP’s operations and management.

Share buybacks, stock splits, and other corporate actions that reward investors have long been a mainstay for CP. The company has paid out and increased dividends for over 25 consecutive years (Dividend Aristocrat) and has beaten the market since going public.

Valuation

CP is solid enough of a company that I would not worry about trying to time a good entry price. However, new investors should always be aware of some basic valuation metrics, so they can understand how companies are valued and what influences their current share price.

Currently, CP is extending gains since Monday and is trading at $90.38, which is near the 52-week low of $82.12. In the current fiscal quarter, CP’s 52-week high is $105.46. This is useful to know, because it gives us a sense of where the bottom of the price range may be if there is a correction.

CP currently has a market cap of $84.02 billion, which places it among the top 10 largest stocks listed on the TSX. From this, we can calculate an enterprise value of $103.07 billion, with an enterprise value-to-EBITDA ratio of 21.40, which is similar to sector peers.

For the past 12 months, the price-to-earnings ratio of CP was 22.96, with a price-to-free cash flow ratio of 37.02, price-to-book ratio of 2.46, price-to-sales ratio of 8.54, and book value per share of approximately $36.56. Based on these figures, CP’s current share price appears to be slightly overvalued.

CP is currently covered by a total of 23 equity analysts. Of them, 18 have issued a “buy” rating, zero have issued a “sell” rating, and five have issued a “hold” rating. Having a majority of equity analysts issue “buy” ratings is generally a bullish sign, as it indicates strong institutional interest.

CP had a Graham number of $50.12 for the last 12 months; a Graham number is a measure of a stock’s upper limit intrinsic value based. Generally, if the stock price is below its Graham number, it is considered to be undervalued and potentially worth investing in. In this case, CP does not appear to be undervalued.

Is it a buy?

Despite its current share price being more or less fairly valued, long-term investors should consider establishing a position in CP if they have the capital. Over the next 10-20 years, your entry price won’t matter as much if CP continues its strong track record of growth and profitability. Consistently buying shares of CP, especially if the market corrects, can be a great way to lock in a low cost basis.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »