There are a number of stocks that are right under our noses and we don’t think to check them out — ones that provide services we use every day and we don’t even consider them as investments. One of these elusive stocks is the TMX Group (TSX: X), a company responsible for listing many of the companies you trade every day.
TMX, located in Toronto, is the largest stock exchange in Canada. The exchange gets its earnings from its businesses, such as trading volumes, which occurs on its exchanges. TMX is working at revising its trading systems to be quicker, using high tech electronic ledger systems based on blockchain technology. On May, TMX Group demonstrated that these tokenized systems can support instantaneous end-to-end transactions with large organizations such as the Bank of Canada, Canada’s central bank.
When I checked out the company’s financials, I was dumbfounded as to how positive its results were. As of Q2, the comment posted earnings which increased 43% over Q2 of 2017. Quarterly revenues were up 20% from 2017 as well — not bad for a company you hardly think of when looking for a potential investment. Trading volumes increased by 15% over the period.
TMX pays a healthy dividend of just under 3%, a dividend that the company has been growing quite rapidly over the years. Its healthy cash flows and earnings allowed the company to make a dividend hike of 16% in May of this year. Given the quality of its financial results, it is likely these dividend raises will continue for the foreseeable future.
The biggest risk to the company at the moment appears to be technological disruption. While the company is working to digitize and modernize its operations, TMX is still a traditional exchange. Alternative stock exchanges, such as the Canadian Stock Exchange (CSE), are beginning to see more companies on their platforms, so this could potentially impact traditional exchangers like TMX on the future. Even now, multiple companies are choosing to list their shares in these alternatives as opposed to an exchange like the TMX, although much of this has occurred because TMX decided not to list them because they can be extremely volatile.
TMX is spending to remain competitive, so I’m pretty sure it’ll be around for a while. Its new technologies are beneficial, and, as an established exchange, many companies will be hesitant to change their listings to a new platform, especially one that is less established than the one offered by TMX.
All in all, there is a pretty compelling argument for investing in TMX. Its performance has been excellent over the past year. It has been strong to remain relevant in the face of technological change. Its growing dividend is also another plus for investors looking for income. It also benefits to a degree from volatility, as the increased uncertainty leads to higher trading volumes.
Even with increased technological disruption, TMX is likely not going anywhere for some time. This is one stock that is definitely worth adding if you are looking for steady capital growth and a growing dividend over the long term.
