The last few months have seen the market plummet. As inflation rages through the system, fears are stoked about the potential for an environment of stagflation and even recession.
At times like this, it’s crucial to have a stock watchlist ready. Being ready to pull the trigger when the volatile market offers good ground is the easiest way to accumulate long-term wealth.
Today, I’m going to feature two high-quality companies with proven endurance no matter what.
Facts and figures will be presented in CAD, the currency in which both companies report earnings.
SA Stock Controller
When selecting my two companies, I started by using Seeking Alpha’s stock screener. I filtered the companies according to the following criteria:
- Quantitative assessment: Hold for a strong buy
- Assessment of SA authors: Buy to strong buy
- Profitability: A+
- Dividend yield: 1.5% to 8.0%
- 5-year dividend growth: +8.0%
- Country: Canada
This reduced the universe of companies from 2,685 to just 6:
From there, I picked two companies I know well that have incredible track records of sustainable growth.
Stock #1: Canadian National Railway (CNI)
Worried about supply chain issues and eroding dollar value? How about adding one of the best goods delivery companies?
CNI is a Class I railroad that moves over C$250 billion in freight annually. It operates approximately 20,000 miles of waterways, linking the east and west coasts of Canada and out to the Gulf of Mexico:
Source: CNI website
One of the nice things about CNI’s business model is that it operates as a duopoly on its home soil in Canada. Given the financial and environmental benefits of moving goods by rail, this means customers have few options, giving CNI considerable pricing power. From the customer’s perspective, rail remains the least expensive way to ship across the country.
In an inflationary environment, this means the business is able to keep pace.
Let’s review two positive catalysts on the table for CNI in the months and years ahead.
A new CEO and an innovative way of doing railroading
At the end of February, CNI appointed Tracy Robinson as President and CEO. She came directly from TC Energy where she also ran the business, with 27 years of experience at Canadian Pacific Railway (CP).
While a change in CEO can often be a dicey proposition, Robinson’s familiarity across the industry and her experience with CNI’s direct competitor in Canada suggests she will come with operational know-how from the start. departure.
During the company’s first quarter 2022 earnings call, Robinson outlined four key initiatives the company is focused on:
- Running like a regular railroad with a “laser focus on speed”.
- Organize their business portfolio to better adapt to CNI’s network and assets.
- Be more integrated between how the business operates and sells, as well as how it invests and grows.
- Continue long-term investments in the network and capabilities of the business to remain efficient and able to grow.
Focusing on the first point, one of the ways CNI intends to improve its car miles traveled is to go beyond Precision Scheduled Railroading (“PSR”). The company now identifies itself as the first Class I railroad to implement Digital Scheduled Railroading (“DSR”):
Source: Presentation of results for the 4th quarter of 2021
This decision allows CNI to use the PSR concepts of precise planning and to rely on the latest technological advances. As the next evolution of rail, DSR will allow the company to leverage big data and artificial intelligence to improve the reliability, predictability and safety of its rail networks.
In a move that puts this great railroad at the forefront of digital innovation, CNI has entered into a seven-year strategic partnership with Google Cloud (GOOGL) (GOOG). This will modernize their IT infrastructure and give them access to capabilities that only a top name like GOOGL can provide.
A basic yet transformative example of the use of this new technology is that of Automated Inspection Portals (‘AIP’). This allows ultra-high definition cameras to capture a 360 degree view of trains as they move along the tracks. AIP uses machine learning algorithms to inspect cars without human intervention and then generate work orders as needed for car repairs. This simplifies the inspection process and does it much more efficiently than if these cars had to be pulled off the line to be human processed.
Despite its financial strength and growth prospects, CNI has not been immune to the general malaise in the stock market.
The company has fallen about 8% since the start of the year:
CNI is currently at a forward P/E of around 21.
As of this writing, the company has a dividend yield of around 2%. While not much to begin with, the company’s latest dividend increase was a whopping 19.11%. Since 1995, when the company went public, it has increased its dividends by around 16% per year.
EPS growth forecasts are between 15 and 20%, with free cash flow between C$3.7 billion and C$4 billion. Coupled with the ~C$5 billion share buyback program confirmed earlier this year, CNI is poised to grow its business while rewarding shareholders.
My intention through July is to capitalize if the stock price shows real signs of weakness. I will review the earnings call at the end of July to see if the company has continued to execute on its priorities.
Action #2: Toronto-Dominion Bank (TD)
TD is the second largest bank in Canada, as well as the sixth largest in North America in terms of total assets. It was the most successful of the Big Five Canadian banks in its foray into American soil.
TD has three main lines of business:
- Retail in Canada
- US retail
- Wholesale banking
Across these services, TD offers the full range of banking capabilities you would expect from a company of its size. Where TD has tried to differentiate itself is in customer service. It won favor with customers by offering longer opening hours than its competitors, thus absorbing market share.
Managing an inflationary environment
Central banks around the world finally seem to be serious about taming the beast that is inflation. As interest rates rise, this can be a boon to banks’ net interest margins.
With the Federal Reserve recently raising its benchmark by 0.75% – its biggest rate hike since 1994 – all signs point to further moves in the period ahead.
Despite its Canadian roots, TD is well positioned in the US market. In fact, it’s well-regarded for its branding as “America’s Most Convenient Bank,” where it holds a huge footprint along the East Coast, all through deposit-rich Florida:
Source: TD Q2 2022 Investor Presentation
Even with talk of a mild recession looming in the near term, the need to rein in rising prices should continue to provide a boon to TD’s earnings potential.
Adapting to a digital border
Banks have always been known to be heavy and slow. Canadian banks in particular are known to be conservatively managed.
However, TD is taking steps that should position it well for the future. The company announced in January that it would hire more than 2,000 technology people to strengthen its strengths in several key technology segments:
- Artificial intelligence
- machine learning
- cyber security
- Automation tools
These roles will be responsible for implementing new methodologies, driving UX design, and driving innovation with TD’s mobile experience.
This aligns with CEO Bharat Masrani’s remarks on the Q2 2022 earnings call, where he highlighted TD’s “Next Evolution of Work” (“NEW”) initiative. NEW’s overall goal and scope will be to revolutionize their operating model and technological capability.
Masrani said using these agile processes at scale has allowed TD to accelerate its time to market with new initiatives as it can deliver new services and offerings in a short period of weeks.
TD has done even worse than CNI above in the recent period. It has fallen around 12.5% since the start of the year as the market crashed:
Still, this should not be seen as a harbinger of what’s to come, nor a reflection of TD’s actual trading performance.
During the recent earnings call, the company commented on its financial strength, highlighting its strong Common Equity Tier 1 ratio of 14.7%. TD also posted 8% year-on-year revenue growth. It currently sits on a forward P/E of around 10.
Coming out of the pandemic with its coffers full, TD offered shareholders a 12.66% dividend increase at the start of the year. I should note, however, that this increase was slightly higher than the norm given that it takes into account the period of the pandemic where banks were instructed to keep their dividends stable between March 2020 and November 2021 by OSFI.
All the same, boosts like this bode well for the future. TD currently has a strong dividend yield that currently hovers around 4.2%.
Both CNI and TD are branded as genuine blue chips. They have shown resilience in all market conditions and demonstrated their ability to continue to reward shareholders.
Higher dividends are my favorite form of inflation protection. When you can get cash flow growing faster than overhead, you can sleep easy.
With CNI and TD, my focus today has been to demonstrate that although they are proven companies, they are also leveraging new technologies and processes to stay ahead. I will be watching them closely in the coming month.