Rails to Jeans: Screening Splits

11/25/2013 7:00 am EST

Focus: STRATEGIES

Neil Macneale

Index Provider, 2 for 1 Index

Each month we add one stock to our model portfolio, chosen from those that have announced stock splits; there were two splits announced last month, and both scored quite favorably in our rankings, says Neil Macneale, editor of 2-for-1 Stock Split Newsletter.

Both Canadian National Railway (CNI) and VF Corporation (VFC) show very similar numbers in many of the critical categories in our screening process.

For our portfolio, I'm going with Canadian National Railway for two reasons. It is the more profitable of the two, and it is a business I understand. I'm not comfortable when it comes to fashion or fad businesses.

Canadian National Railway was privatized in 1995 and began trading on the NYSE in 1996. The company has thrived, growing both in Canada and the US, mostly through acquisitions of smaller lines. CNI serves all the major commodity industries including coal, oil, lumber grain, and chemicals.

Connecting the Atlantic, Pacific, and Gulf of Mexico, it is truly a North American railroad. CNI is a big, stable, profitable business, and the numbers reflect this.

A long-term 8% growth in earnings, a 1.5% dividend yield growing at 12% per year, and a strong balance sheet are all metrics to my liking.

The stock's volatility is about equal to that of the market. The best numbers are the five-year average 25% net profit margin and 20% return on equity. This is a great business!

Meanwhile, the other stock split announcement from October was VF Corporation, an apparel company based in North Carolina.

The company was founded in 1899 and went public in 1959. It has grown internally and through acquisitions, and now owns numerous brands such as Lee, Rustler, Majestic, Nautica, JanSport, Wrangler, Eagle Creek, Timberland, Vans, North Face, and many more.

Such wide diversification mitigates some of my anxiety regarding the fashion business, and most of its numbers are very similar and just as good as those of CNI. It's even a little less volatile and it pays a bigger dividend, but VFC is not quite as profitable.

This is a 4-to-1 split. Its Board of Directors must be very confident and I could hardly argue if you decided to buy it.

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