Canadian Pacific Railway (symbol CP on Toronto) has long been a cornerstone of the Canadian economy.

CP was incorporated on February 16, 1881. The company began cross-Canada train service after the rail link to the Pacific coast was famously completed with the driving of the “last spike” at Craigellachie, British Columbia, on November 7, 1885.

Prime Minister John A. MacDonald’s government built the rail line to satisfy a condition of British Columbia’s entry into Confederation in 1871.

In its early days, CP had about 11,200 kilometres of track. Today, it still ships freight between Montreal and Vancouver, but numerous branch lines have extended its rail network to about 25,000 kilometres. In the U.S., its subsidiaries connect its Canadian lines to major hubs in the midwest and northeast. Alliances with other railways extend CP’s reach to Mexico.

CP is one of the safety-conscious income stocks we cover in our Canadian Wealth Advisor newsletter.

Buffett move highlights attractiveness of high-quality railway stocks

Investor interest in railways continues to rise as the global economy improves. For example, in November 2009, billionaire investor Warren Buffett’s Berkshire Hathaway Inc. bought the 77% of U.S.-based railway Burlington Northern Santa Fe Corp. that it didn’t already own. Berkshire paid $44 billion U.S. to complete the takeover.

Burlington Northern owns one of the largest railroad networks in the U.S., with about 51,500 kilometres of track.

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Much investor interest surrounding railways stems from the belief that they will benefit from higher Asian demand (including India and China) for coal and other commodities from North America.

This income stock’s strengths put it in a “sweet spot” for rising commodity profits

We agree that rising commodity demand favours railways. That’s because they are by far the most efficient way of hauling commodities, such as coal, from the interior of North America to the coasts, where they can be loaded onto ships.

What’s more, CP is heavily focused on shipping commodities: Grain, coal, sulphur, fertilizers and forest products accounted for 47.7% of its revenue in the first quarter of 2010. To top it off, the income stock’s railroad network allows for easy access to the Port of Vancouver, an important shipping hub for goods bound for Asia.

Cost cuts, improving economy propel CP’s results higher

The recession hurt demand for rail service. To cope, CP laid off about 16% of its workforce, put some trains in storage, and suspended contributions to its employee share-purchase plan. It also sold some assets, such as Windsor Station in Montreal.

Thanks to its cost cuts and an improving North American economy, the income stock’s earnings jumped 25.0% in the three months ended March 31, 2010. Revenue rose 5.7%, partly due to higher commodity demand: Revenue from coal rose 28%, metals and minerals gained 6% and grain and fertilizers were up 4%. Forest-product revenue declined 5%.

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