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Canadian Pacific Hit 52-Week High: What’s Driving the Rally?

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May. 20 2019, Published 1:31 p.m. ET

CP stock hit new highs

Canadian Pacific (CP) stock attained a new 52-week high of $229.86 on May 17 before closing trade a tad lower at $228.72. The stock of this second-largest Canadian railroad company has made a remarkable run so far this year and has outperformed broader market returns.

YTD, the stock has returned 28.8%, while major US stock exchanges including the NASDAQ, the Dow Jones, and the S&P 500 have only gained 17.8%, 10.4%, and 14.1%, respectively. CP has also outpaced the returns of the iShares Transportation Average ETF (IYT), which invests in US transportation stocks on the Dow Jones. The ETF is up 14.6% YTD.

CP’s YTD return has remained on par with the majority of railroad companies. Major railroad stocks Kansas City Southern (KSU), Union Pacific (UNP), and CSX (CSX) have returned 27.8%, 26.3%, and 26.2%, respectively. Norfolk Southern (NSC) has the highest YTD gain of 36.1%.

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What’s driving this rally?

The optimism surrounding the stock could be due to its impressive quarterly performance and the optimistic earnings outlook for fiscal 2019.

The company had reported lower-than-expected first-quarter results on April 23 as harsh winter conditions and derailment caused business disruptions and increased expenses during the quarter. However, CP registered YoY growth in its top and bottom-line results.

Moreover, as the factors mentioned above are one-time in nature, investors have remained optimistic that the company will bounce back in the upcoming quarters. Ahead of first-quarter 2019 results, CP’s bottom-line results have surpassed analysts’ estimate in seven consecutive quarters and improved significantly YoY.

Going forward, despite worse-than-expected first-quarter results, the company is still optimistic that its fiscal 2019 earnings will grow in the double-digit range and that volumes will grow in mid-single digits. Wall Street analysts’ consensus earnings estimate of $16.43 represents YoY growth of 13.2%.

Furthermore, CP’s sustained focus on enhancing shareholders’ wealth through dividend hikes and share repurchases make it an attractive pick for risk-averse investors. During its first-quarter results, the company returned $298 million through dividend payments and buybacks.

Moreover, the company on May 6, announced a 27.5% hike in its quarterly dividend payout to $0.83 per share from $0.65 per share. The latest dividend hike announcement marked the fourth consecutive year of quarterly dividend increase for the company. Since 2014, the company’s dividend rate has increased 137%, and it has paid ~$1.5 billion in dividends and repurchased $7.7 billion worth of its common stock.

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