Top 5 Canadian Businesses to Own: 2022 Edition

Editor’s note: This article is based on Morningstar’s 2022 edition of Best Companies to Own, available to US investors. Find it full list of companies and discover our selection methodology.

The markets have been a scary place over the past two weeks, with a lot of uncertainty, and even some corrections. However, as Michael Keaveney of For Morningstar Investment Management reminds us, volatility is not something to be feared.

“It is prudent to remember that volatility is an integral part of equity investing. Long-term investors should look beyond monthly noise and focus on returns that are more likely to unfold over longer periods. And valuation-focused investors can also take advantage at these times and choose to make other investments in areas that may have been driven below a fair valuation of value due to short-term sentiment. “said Keaveney.

In other words, think long term. Remember that when you buy a stock, you are actually buying part of the underlying business – you are now a co-owner of the business. It is important for you to understand your business, understand its business and know what drives it. One place to start looking for these ideas is our list of top companies. The best companies tend to exceed your expectations. They find investment opportunities that you might not have thought of or that you might not be able to take as an individual, increasing the intrinsic value of their business. Over time, these companies tend to be worth a lot more than they are today.

One of the best ways to identify high-quality companies is to check the Morningstar Economic Moat Rating, which rates a company’s competitive advantage. The term was coined by Warren Buffett, who also said, “The key to investing is…determining a given company’s competitive advantage and, more importantly, the sustainability of that advantage. Products or services that have large, enduring moats around them are those that offer rewards to investors. We used the Morningstar Economic Moat rating as a starting point to compile a list of the best businesses you can own. As the top companies in our universe of coverage, they have a wide economic moat, the strength of their competitive advantages is either stable or increasing, they have predictable cash flows and allocate their capital efficiently (you can read more about this methodology here).

Five of the companies we cover in Canada are on the list. Here they are:

Company Name



Canadian National Railway Company



Canadian Pacific Railway Ltd.



Royal Bank of Canada


Financial services

The Toronto-Dominion Bank


Financial services

Waste Connections Inc.



Canadian National Railway (CNR)

While several peers have caught up in recent years, precision rail pioneer Canadian National has consistently been the highest-margin Class I railroad, and its operating ratio six-year adjusted average (59.8%) leads the pack. “Railroads are strong cash generators, and CN is no exception with free cash flow averaging around 10% of sales over the past decade. CN’s mix is ​​richest in intermodal, agriculture and chemicals, which each contribute 19% to 27% of revenue,” said Morningstar analyst Matthew Young. A railroad’s competitive advantages are inseparable from its geography, and CN’s network features a unique three-coast system that stretches from coast-to-coast Canada and from the United States to in New Orleans. CN’s EJ&E line around Chicago has increased speed to a major bottleneck over the years, which has benefited network reliability and asset turnover. In addition, CN enjoys exclusive access to the Canadian port of Prince Rupert, which has helped support CN’s intermodal growth. We suspect that CN is less exposed to U.S. regulatory risk than U.S. Class I railroads because on its U.S. route, the option to ship by barge on the Mississippi River makes CN customers a little less captive than those of the inland railways.

Canadian Pacific Railway (PC)

Following the appointment of railroad legend Hunter Harrison as CEO in 2012, Canadian Pacific embarked on a turnaround in profitability and efficiency that proved quite successful. Harrison and his successor – operations expert Keith Creel (who worked alongside Harrison for 20 years) – took CP from one of the worst Class I sideline performers to one of the best. “We appreciate that CEO Creel has pushed to infuse CP’s culture with the principles of accurate rail schedules, which underpin rail progress. In 2018, CP’s profitability caught up with PSR pioneer and historical margin leader Canadian National and actually surpassed CN in 2019 with an operating ratio of 60%,” says Young.

Royal Bank of Canada (RY)

Royal Bank of Canada or RBC (RY) is one of the two largest banks in Canada by assets and one of six that collectively hold approximately 90% of the country’s bank deposits. The bank derives two-thirds of its revenue from Canada, with the remainder distributed primarily in the United States and the Caribbean. Morningstar analyst Eric Compton says it has done an admirable job of expanding its non-banking business lines, running efficient banking operations and generating some of the best shareholder returns in the industry, and he believes that RBC should remain one of the dominant Canadian banks for years to come, even as a more difficult macroeconomic environment weighs on medium-term earnings growth.

The Toronto-Dominion Bank (TD)

Toronto-Dominion is the other of the two largest banks in Canada by assets and one of six that collectively hold about 90% of the nation’s bank deposits. The bank derives about 55% of its revenue from Canada and 35% from the United States, with the rest coming from other countries. “Toronto-Dominion has done an admirable job of focusing on its Canadian retail business and achieving first or second market share for most key products in this segment. The bank also holds the second largest business banking market share in Canada. With over $400 billion in Canadian assets under management and status as one of the top three brokers in Canada, and as Canada’s largest card issuer, Toronto-Dominion is expected to remain one of Canada’s leading banks for years to come,” Compton said, adding that the bank took a number of fees (such as integration fees, restructuring fees, etc.).

Waste Connections (WCN)

Waste Connections (WCN) is a fully integrated waste hauler. Industry analyst Brian Bernard points out that Waste Connections leverages its huge network of collection lanes which provides significant control over the waste stream, moving waste from commercial, industrial and residential end markets to its valuable landfill assets. In 2016, Waste Connections (the third-largest integrated waste hauler at the time) merged with the fourth-largest provider, Progressive Waste, essentially doubling in size. The deal allowed Waste Connections to apply its industry-leading operational know-how and pricing discipline to bring Progressive’s profitability up to its own. Waste Connections has also entered new geographies, most of which align with its differentiated focus on less competitive secondary markets, a strategy that has contributed to its industry-leading profitability. Bernard expects Waste Connections to continue with its integrated acquisition strategy, and its ability to increase cost base on acquired volume (through its extensive landfill ownership, a preferred asset) should support the growth in cash flow. available cash.

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