Why TMX Group (TSX:X) Jumped 12% This Week

TMX Group’s (TSX:X) better-than-expected earnings led to a spike in its market value this week. However, the growth spurt is far from over. 

| More on:
edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.

Image source: Getty Images

It seems odd that in a week where the global stock markets plummeted and political tensions hit a fever pitch, the owner and manager of Canada’s flagship stock exchanges saw a spurt in market value.

TMX Group (TSX:X) shares were trading 12% higher today than the same time last week, even as the S&P/Toronto Stock Exchange Composite Index stayed flat. 

The spike in value can be attributed to the company’s better than expected earnings this quarter. TMX reported higher revenue and lower costs in the second quarter of 2019 on Thursday, which beat the expectations of many analysts and investors. Now, the group is expected to expand its dividend payout.    

This market-beating performance should come as no surprise to long-term TMX shareholders. The stock has nearly tripled since the start of 2016, while the broader market is up only 36% since then.

I believe this phenomenal pace of growth is powered by three underlying elements of the TMX strategy:

International diversification

The group has been steadily expanding its global footprint since 2015. Now, one third of the company’s revenue is generated outside Canada, over half of which is recurring revenue with long-term contracts. Management expects this proportion of international sales to grow over time. 

The successful diversification of the business model makes TMX more robust and less tethered to the domestic economy. Investors can expect the recurring income from Europe and Asia to offset any downturn in the North American economy in the near-term, which should limit the downside for shareholders. 

Focus on technology

TMX isn’t just expanding geographically, but also operationally. The group’s efforts to modernize its platform is the driving force of its efficiency and steadily decreasing costs. Meanwhile, the company’s Global Solutions, Insights and Analytics is its fastest growing business segment.

Selling data and analytical tools to corporate clients from across the world is a lucrative business. In 2018, the segment’s operating margin was reported at nearly 60%.  

However, TMX’s hunt for innovation isn’t limited to efficiency and data, it also includes blockchain technology. Last year, the group announced its intention to launch a cryptocurrency trading and custodian service platform for clients. 

This new venture could be immensely lucrative if cryptocurrency trading becomes mainstream, while the asset-light nature of crypto platforms means the downside is limited if it fails.  

A natural monopoly

Finally, the most attractive aspect of TMX’s business model is its natural monopoly. Stock markets are highly regulated and systemically ingrained entities that are usually limited to one player.

The Intercontinental Exchange (ICE), for example, is the sole operator of the New York Stock Exchange and a number of clearing houses that spread from Singapore to London. 

Similarly, most of Canada’s mainstream capital markets, including the Toronto Stock Exchange, TSX Venture Exchange, the TSX Alpha Exchange, and the Montréal Exchange, are all owned by the TMX Group.

This favourable position leads to robust margins and substantial cash flows. It’s the driving force behind the company’s consistently high dividend payout. 

At the moment, the stock offers a 2.2% dividend yield. However, investors can expect this rate to steadily climb up to the company’s five-year average of 2.87%. 

Bottom line 

TMX Group’s better-than-expected earnings led to a spike in its market value this week. However, its global footprint, focus on technology, and natural monopoly may imply that the growth spurt is far from over. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool owns shares of Intercontinental Exchange and TMX GROUP INC. / GROUPE TMX INC. TMX Group is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Retirees sip their morning coffee outside.
Dividend Stocks

How I’d Invest $1000 in February to Make Easy Passive Income

Looking to earn some extra passive income in February but don't have much cash? Build an easy portfolio with these…

Read more »

sad concerned deep in thought
Dividend Stocks

Is it Worth Investing in Rogers or Shaw Before the Pending Merger?

A Rogers stock and Shaw stock deal looks all but certain, yet should investors still buy the stock? Or are…

Read more »

runner ties shoe while stopped on grass outside
Dividend Stocks

Is Nutrien Stock a Buy in February 2023?

Nutrien stock should benefit from the very favourable supply/demand fundamentals in the agriculture business in 2023.

Read more »

Dividend Stocks

Is Brookfield Asset Management a Buy in February 2023?

Brookfield Asset Management is among the largest stocks trading on the TSX. Let's see why BAM stock is a buy…

Read more »

Growth from coins
Dividend Stocks

3 Dividend Stocks Growth Investors Should Buy Today

If you want growth AND dividends, then these are the three dividend stocks I would buy right now.

Read more »

sale discount best price
Dividend Stocks

2 Canadian Stocks That Are Simply too Cheap to Avoid

These Canadian stocks have fallen far from all-time highs, but that leaves significant value to lock up, as well as…

Read more »

Payday ringed on a calendar
Dividend Stocks

2 Best Monthly Dividend Stocks for February 2023

Here are two of the best Canadian monthly dividend stocks you can buy in February 2023.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Got $10,000? Create $231 in Passive Income Each Quarter Starting Today!

If you have some cash you're sitting on, now is the time to invest in this passive-income stock that continues…

Read more »