CN’s shares trade about 19 times the company’s projected earnings per share for 2017. That seems high for a cyclical railway stock, but several factors significantly reduce CN’s risk.

That’s mainly because big railways face little competition from new entrants. They also move goods much more efficiently than trucks and planes. Those factors make it easier for CN to maintain, or raise, the rates it charges customers.

CANADIAN NATIONAL RAILWAY CO. (Toronto symbol CNR; www.cn.ca) operates Canada’s largest railway. Its 32,200-kilometre network stretches across the country, and passes through the U.S. Midwest to the Gulf of Mexico.

Ottawa nationalized the company in 1922, as railways were critical to Canada’s early economic growth. More than 70 years later, in 1995, CN became a publicly traded company.

Commodities, such as grain, forest products, coal and fertilizers, accounted for 68% of CN’s 2016 revenue. They were followed by intermodal (containers that travel by rail, ship and truck), 25%; and cars and auto parts, 7%.

The company’s broad geographic presence also cuts its risk: 18% of its revenues came from Canadian domestic traffic; 18% from U.S. domestic traffic; 33% from cross-border shipments; and 31% from overseas traffic.

As well, CN is the only major railway in North America that serves three coasts: Atlantic, Pacific, and the Gulf of Mexico. That gives it a big advantage, as its customers need only deal with one railway instead of transferring their goods among smaller carriers across different regions.

CN’s revenue rose 27.1%, from $9.9 billion in 2012 to $12.6 billion in 2015. However, revenue fell 4.6% to $12.0 billion in 2016 as producers of crude oil and coal cut their shipments due to lower prices for those commodities.

Earnings gained 45.8%, from $2.5 billion in 2012 to $3.6 billion in 2016. CN is an aggressive buyer of its own shares. As a result, its earnings per share soared 63.3%, from $2.81 to $4.59 (all per-share amounts adjusted for a 2-for-1 stock split in December 2013).

In the three months ended June 30, 2017, CN’s revenue rose 17.1%, to $3.3 billion from $2.8 billion a year earlier. The gain is mainly due to higher revenue from shipping coal, grain, fertilizers, metals and automotive parts.

The company’s earnings in the quarter rose 17.1%, to $1.01 billion from $865 million. Due to fewer shares outstanding, earnings per share gained 20.7%, to $1.34 from $1.11.

CN’s operating ratio in the quarter worsened to 55.1% from 54.5% a year earlier. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower the ratio, the better.) The increase is mainly due to rising fuel and labour costs. Even so, CN’s operating ratio remains one of the lowest among the big North American railways.

Blue Chip Stocks: Plenty of free cash flow to keep raising this dividend

The company has several other advantages over its rivals. For example, its exclusive lines in Illinois let it avoid the heavily congested rail hubs in Chicago. As a result, its trains move faster.

CN is also the only railway to ship goods through Prince Rupert, B.C., the closest North American port to Asia.

The Prince Rupert Port Authority is currently expanding the port’s capacity. That project will let it handle 60% more shipping containers by the end of 2017.

CN plans to spend $2.6 billion on upgrades to its tracks and other operations this year. Those outlays include $100 million for 22 new high-horsepower locomotives. They will let the railway run longer trains and speed up deliveries.

CN can comfortably afford those investments. As of June 30, 2017, its long-term debt was $8.7 billion, or just 11% of its market cap. The company also held cash of $131 million.

Moreover, CN generated free cash flow (regular cash flow less capital expenditures) of $1.7 billion in the first half of 2017, up 41.9% from a year earlier. That gives the company plenty of room to keep buying back shares. During those six months, it spent $1.0 billion on share repurchases.

CN has also increased its dividend each year since it became a public company in 1995. The latest rise was in March 2017 when the company increased the quarterly dividend by 10.0%. The new annual rate of $1.65 a share yields 1.6%.

CN has plenty of flexibility to keep increasing the payout. In the first six months of 2017, dividends accounted for just 37.6% of its free cash flow.

The recent rise in the Canadian dollar will hurt the contribution of CN’s U.S. operations: each one-cent increase against the U.S. dollar lowers the company’s overall earnings by $30 million. Changes to the North American Free Trade Agreement could hurt cross-border traffic and further slow CN’s growth.

However, the company’s strong focus on efficiency should continue to spur its earnings. As well, the lack of new pipeline capacity should prompt oil producers to ship more of their products by rail.

The stock has gained 25% in the past year and hit its alltime high of $109 in June 2017. CN now trades at 19.7 times the $5.17 a share that the company will probably earn in 2017.

CN’s earnings could rise even higher in 2018, to $5.64 a share. The stock trades at a more reasonable 18.1 times that forecast.

Recommendation in The Successful Investor: CN Rail is a buy.

For our advice on making the most of blue chips, read How blue chip dividends can give you higher portfolio returns.

For our recent report on a Canadian blue chip adapting to changing conditions, read Blue chip knows how to profit from information revolution.